Euro Drops as Irish Government Plans to Dissolve After Budget

Euro Gains After Ireland Agrees With EU Bank-Rescue Package
The euro advanced against the dollar and yen amid optimism an agreement to rescue Ireland’s banks will prevent contagion across the region’s debt markets. Photographer: Hannelore Foerster/Bloomberg

The euro fell for the first time in four days versus the dollar and yen after Ireland’s government started to unravel and Moody’s Investors Service said it may lower the nation’s credit rating by more than one level.

The dollar and yen advanced against most of their major counterparts as a drop in stocks encouraged investors to seek refuge from Europe’s financial crisis. The euro slid from a one-week high against the dollar as Ireland’s Prime Minister Brian Cowen said a day after asking for European aid that the government will resign following passage of the nation’s budget.

“Political uncertainty in Ireland could risk the timely implementation of the new budget and the austerity measures required to bring the deficit down,” said Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc., a currency brokerage. “That’s a large negative for the euro.”

The euro fell 0.3 percent to $1.3627 at 5 p.m. in New York, from $1.3673 on Nov. 19, after reaching $1.3786, the highest since Nov. 11. The common currency decreased 0.6 percent to 113.56 yen, from 114.23. The dollar dropped 0.3 percent to 83.33 yen, from 83.55.

A close in the euro below $1.3648 means it may depreciate to $1.3510 or to the November low of $1.3436 reached Nov. 16, according to Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York, citing the firm’s data.

‘Further Losses’

“If we close on a low today, that’s not a good technical sign for the near term and will leave the euro open to further losses,” Forcheski said. Technical analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

The cost of insuring against losses on Portuguese government bonds climbed for a third day as traders looked past the bailout of Ireland to determine which country will be next to require assistance.

Credit-default swaps tied to Portuguese debt rose 12 basis points, or 0.12 percentage point, to a one-week high of 430 basis points, according to UBS AG. The contracts, which reached a record 478 basis points on Nov. 11, have widened about 100 basis points in the past month.

“Overnight there was a lot of excitement over developments in Ireland,” said Camilla Sutton, a Bank of Nova Scotia currency strategist in Toronto. “A lot of that euphoria has diminished.”

Ireland became the second euro country to seek a rescue as the cost of saving its banks threatened a rerun of the Greek debt crisis that destabilized the currency.

‘Debt Burden’

The aid will “crystallize more bank-contingent liabilities on the government balance sheet, and increase the Irish sovereign’s debt burden,” Moody’s analyst Dietmar Hornung said via e-mail today.

Increases in state debt “being discussed exceed the expectation we had in October when we put Ireland’s Aa2 rating on review for downgrade. A multi-notch downgrade” is “now the most likely outcome,” Hornung wrote. The package may total as much as 95 billion euros ($129 billion), further raising Ireland’s debt, according to Moody’s.

Parliamentary support for Cowen evaporated today after the Green Party, his junior coalition partners, called for a January election and said he “misled’ voters over the past two weeks.

Canada’s dollar depreciated 0.2 percent to C$1.0187 versus the greenback as a drop in stocks reduced demand for assets related to economic growth. The loonie earlier touched C$1.0122, the strongest level in almost a week.

Drop in Stocks

The Standard & Poor’s 500 Index fell 0.2 percent. The yield on the 10-year Treasury note dropped seven basis points to 2.80 percent. Crude oil for January delivery gained 0.1 percent to $81.60 a barrel after earlier falling 1 percent.

New Zealand’s currency slid 0.9 percent to 77.20 U.S. cents after Standard & Poor’s revised its outlook on the nation’s credit rating to negative because of a weakening of banks. The “AA+” long-term and “A-1+” short-term sovereign credit ratings were affirmed.

Reserve Bank of New Zealand Governor Alan Bollard said last week that the nation is in danger of a “prolonged” struggle to recover from the global recession because of diminished demand for its goods from the U.S., U.K. and Japan.

IntercontinentalExchange Inc.’s Dollar Index, which measures the greenback’s performance against the currencies of six major trading partners including the euro and yen, advanced 0.2 percent to 78.628.

The gauge of the U.S. currency has climbed as much as 5.1 percent from its low this year on Nov. 4 on speculation the Federal Reserve’s plan to buy an additional $600 billion in government debt is unlikely to debase the dollar as long as the economy continues to strengthen.

“The dollar has found a bottom,” said Lane Newman, director of foreign exchange in New York at ING Groep NV, the largest Dutch financial-services company.



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