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Euro Declines as Debt Ratings Reviews May Undermine Borrowing

The euro dropped against most of its major counterparts as more possible downgrades to the region’s debt boosted concern about some countries’ ability to tap the international bond market.

The 16-nation currency weakened to a two-week low against the dollar after Fitch Ratings placed Greece’s BBB- rating, the firm’s lowest investment-grade level, on rating watch negative. The Swiss franc extended gains against Europe’s single currency after Moody’s Investors Service said it may cut Portugal’s credit rating. The Brazilian real gained as commodity prices surged.

“The Swiss franc, which is typically a currency sold in an upward pro-risk environment, is being bid as a proxy for money that would normally be invested into Europe,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto.

The euro dropped 0.2 percent to $1.3100 as of 5:01 p.m. in New York, from $1.3131 yesterday. It touched $1.3074, the lowest since Dec. 2. The common currency fell 0.3 percent to 109.71 yen. The dollar was little changed at 83.75 yen.

The franc appreciated 0.9 percent to 1.2551 per euro after touching 1.2546, a record since the creation of the common currency.

Hot Commodities

The Reuters/Jefferies CRB Index of raw materials rose as much as 0.9 percent to the highest since Oct. 3, boosting currencies of commodity-exporting countries.

The euro earlier rose as much as 0.5 percent versus the greenback after Chinese Vice Premier Wang Qishan said his nation had taken “concrete action” to help the European Union with its debt problems. The comments boosted speculation investments by China, which holds a record $2.65 trillion of foreign-exchange reserves, will ease Europe’s sovereign-debt crisis and boost the allure of assets in the region.

The euro’s gains were reversed by speculation some European nations will struggle to raise funds amid a slew of credit-rating and outlook changes.

Greece had its BBB- long term foreign and local currency issuer default ratings placed on rating watch negative by Fitch.

Rating Is at Risk

Moody’s said Portugal’s credit rating is at risk amid the economy’s “sluggish” growth. The agency last week cut Ireland by five levels, put Greece on review for a potential “multinotch” downgrade, and said on Dec. 15 that Spain’s rating was at risk. Standard & Poor’s is reviewing its assessments of Ireland, Portugal and Greece.

The difference in yields between Portuguese 10-year bonds and German bunds rose for a 10th straight day, widening to 355 basis points.

“Moody’s placement of Portugal on negative watch is more of an emblem of the problems that will continue to afflict Europe as we move into 2011,” said Paresh Upadhyaya, head of Americas G-10 currency strategy at Bank of America Corp. in New York. “These fundamental problems will not go away, they’re going to continue.”

The euro has declined 10.4 percent so far this year, the biggest loss among the 10 developed nations measured in the Bloomberg Correlation-Weighted Currency Indexes. The dollar has dropped 1.1 percent and the yen has added 11.1 percent.

The 16-nation currency has added 0.9 percent against the dollar so far this month and the yen has lost 0.1 percent.

The Brazilian real was the second-biggest gainer against the dollar among the major currencies, after the franc. It added 0.7 percent to 1.6954 per dollar.

Emerging Strength

“There’s a little bit better attention on emerging markets,” said Win Thin, global head of emerging-market strategy at Brown Brothers Harriman & Co. in New York. “The fundamentals remain very good.”

The yen earlier climbed to a one-week high versus the dollar on speculation Japanese exporters purchased the nation’s currency as the end of the year approaches.

Japan’s large manufacturers expect the yen to trade at an average of 86.47 per dollar in the year through March, the highest since the Bank of Japan’s Tankan business-confidence survey included the yen-forecast question in 1996, compared with the 89.66 predicted in September, the survey showed Dec. 15.

The Bank of Japan said after its meeting today that it will “steadily” provide liquidity to support demand. Governor Masaaki Shirakawa warned about the risks a climb in bond yields posed to the nation’s expansion.

“Volatile long-term rates can affect the economy, prices and financial conditions by influencing borrowing costs for households and companies,” Shirakawa told reporters in Tokyo today after the central bank left its credit programs unchanged and kept the key interest rate between zero and 0.1 percent.

The Federal Open Market Committee authorized the extension through Aug. 1 of its temporary dollar liquidity swap arrangements with the European Central Bank and the central banks of Japan, Canada, Switzerland and the United Kingdom.

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