The euro fell to the weakest in five weeks against the dollar after European Central Bank council member Axel Weber said the ECB should keep stimulus measures in place through the end of the year.
The euro reached the lowest since July 1 versus the Swiss franc after Weber told Bloomberg Television it would be “wise” to keep full allotment in weekly, monthly and three-month refinancing operations until after the end of 2010. The yen headed for a weekly gain versus 15 of its 16 major counterparts as stock markets fell and on signs the global economic recovery is slowing, boosting demand for the currency as a refuge.
“The ECB has effectively put exit strategy on hold until next year with the prospect of delayed exit weighing on the euro,” said Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishi UFJ Ltd. in London. “It just takes away a pillar of support.”
The euro fell 0.9 percent to $1.2703 as of 6:48 a.m. in New York, after dropping to $1.2685, the weakest since July 14. Japan’s currency was at 108.42 per euro from 109.49 in New York yesterday, after reaching 108.31, the strongest since July 1. The euro traded at 1.348 francs from 1.3233 francs yesterday, after touching 1.3140 francs. The yen was little changed at 85.33 per dollar.
The common currency accelerated declines as the Stoxx Europe 600 Index fell 0.9 percent, extending a 1.4 drop yesterday. Reports next week may show U.S. home sales fell, Japanese export growth slowed and German business sentiment weakened.
“Most of these discussions about the continuation of the exit I think will be focused on the first quarter,” Weber, who heads Germany’s Bundesbank, said in an interview with Bloomberg Television in Frankfurt yesterday. “It’s clear that we need to re-embark on a normalization procedure.”
“Dovish comments from Bundesbank President Weber were the catalyst for the latest bout of euro selling,” analysts from RBC Capital Markets led by Adam Cole in London wrote in a note to clients today. “The comments suggest the ECB will be generous in re-injecting liquidity when a huge volume of previous repo arrangements expire next month.”
Purchases of existing U.S. homes fell 13.9 percent in July, after declining 5.1 percent in May, economists said before the Aug. 24 report. Japan’s export growth slowed to 21.8 percent in July from 27.7 percent in June, and the Ifo institute’s German business climate index slid to 105.5 in August from 106.2 the previous month, separate surveys showed before the Aug. 25 data.
“What is happening to market sentiment at the moment is that any negative data is seeing risk aversion spike,” said Khoon Goh, head of market economics and strategy at ANZ National Bank Ltd. in Wellington. “The thing that is helping to drive yen strength is this ongoing risk aversion.”
The yen has gained 14 percent this year, the best performance among 10 developed-world currencies, Bloomberg Correlation-Weighted Currency Indexes show. The Swiss franc rose 4 percent. The two currencies typically strengthen in times of financial and economic turmoil as investors repatriate funds from the nation’s trade surpluses.
Gains in the yen were tempered on speculation the Japanese government will take steps to counter this week’s 1 percent appreciation versus the dollar.
The probability the Bank of Japan will intervene in currency markets is at a six-year high of 51 percent, according to a Morgan Stanley model that uses factors such as net positions in Japan’s currency. Japan hasn’t intervened to weaken its currency since 2004.
“The yen is a risk-aversion trade,” said Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh, which has about $228 billion of assets. “The likelihood of any intervention by the authorities remains low, but if they did respond, then the impact would be very significant.”
The yen’s climb to a 15-year high of 84.73 against the dollar on Aug. 11 has stoked concern that exporters’ earnings could weaken and deflation might deepen. Finance Minister Yoshihiko Noda said today he will meet with Prime Minister Naoto Kan next week to discuss the economy and currency.
The euro was poised for a second weekly loss versus the franc as French President Nicolas Sarkozy readies France’s 2011 budget along with a bill to increase the retirement age.
Finance Minister Christine Lagarde and Prime Minister Francois Fillon, who will also attend the meeting, have emphasized the need for spending cuts since June. The increase in France’s government debt since the financial crisis has been “significant,” Moody’s Investors Service wrote in a quarterly report this week.
“Data have been consistently weak,” said David Deddouche, a foreign-exchange strategist at Societe Generale SA in Paris. “The trend is risk off and I’m expecting more franc strength.”
Sarkozy has promised to cut France’s deficit to 6 percent of output next year and 3 percent by 2013 from about 8 percent this year. France’s finance ministry is working on the hypothesis that the country’s economic growth in 2011 will be about 2 percent, daily Le Figaro reported, without citing anyone.
That compares with the government’s current forecast for growth of 2.5 percent.
Australia’s dollar fell to a four-week low versus the yen as polls signaled tomorrow’s election may result in a hung parliament.
“Two factors have made the election more interesting --the threat of a hung parliament and significant differences across the major and minority parties on a mining sector tax,” David Forrester, a currency economist in Singapore at Barclays Capital, wrote in a note to clients. “We favor positioning for a weaker Aussie versus other commodity currencies.”
The Australian currency fell to 75.61 yen, after sliding to 75.48 yen, the lowest since July 20.
-- Editors: David Clarke, Keith Campbell.