Euro Plunges as Greek Leader Loses Support Amid Debt Deadlock

The euro dropped the most in almost six weeks against the dollar after the Greek prime minister’s government lost political support as the European Union struggled to break a deadlock on a second financial rescue for the nation.

Europe’s shared currency fell versus most of its major counterparts, except for Sweden’s krona, Norway’s krone and Denmark’s krone, which dropped as commodity prices slumped. Demand for assets linked to economic growth also eased after reports showed slowing manufacturing in the U.S. Sterling fell versus the dollar after a report showed Britain’s jobless claims rose in May more than economists forecast.

“There is a lot of noise going on in Europe and in Greece,” said Sara Yates, a foreign-exchange strategist at Barclays Plc in London. “What we’ve seen from the opposition party, that they don’t seem to be on the same page wanting to push through fiscal austerity and more privatization, that is worrying.”

The euro fell 1.8 percent to $1.4181 at 5 p.m. in New York, from $1.4440 yesterday, after touching $1.4156, the lowest level since May 27. It weakened as much as 2 percent against the dollar, the biggest intraday drop since May 5, when it fell as much as 2.1 percent.

Dollar, Yen

The common currency slid 1.2 percent to 114.80 yen, from 116.23. The dollar gained 0.6 percent to 80.96 yen, from 80.49, after touching 81.06, the highest level since June 2.

The threat of the Greek debt crisis spilling into the banking sector is the biggest risk to the region’s financial stability, European Central Bank Vice President Vitor Constancio said at a briefing in Frankfurt today.

“Some resolution is necessary and the longer Greece kind of wavers in this grey area the more toxic for the euro,” said Jessica Hoversen, a New York-based analyst at futures broker MF Global Holdings Ltd. “Euro weakness will be broad based.”

The euro may fall below $1.40 for the first time in three weeks, according to Citigroup Inc., citing technical indicators.

The failure of the euro to break above $1.4711, the 76.4 percent Fibonacci retracement level from the May 4 high of $1.4940, has seen the euro weaken 3.3 percent against the dollar. Today’s break below the 55-day moving average of $1.4409 may see the euro weaken to $1.3970, said Tom Fitzpatrick, chief technical analyst at Citigroup in New York.

Technical Level

“The inability to break the 76.4 percent retracement level signaled a danger to push lower,” Fitzpatrick said in an interview. “The euro is trading heavily, so our sense is we can go and retest the $1.3968 level and if that breaks there is a danger we see that move accelerate.”

The premium for euro three-month put options granting the right to sell the common currency against the greenback reached as much as 2.58 percentage points today over calls, which allow for purchases. That’s the most since June 2010 on an intraday basis.

Greek Prime Minister George Papandreou, struggling to push through austerity measures demanded by international lenders, was told to step aside and let the president name a so-called technical government to renegotiate the terms of the nation’s rescue package, said an official in the opposition New Democracy Party.

Police fired tear gas at 20,000 people that encircled the Parliament House in Athens today to protest Papandreou’s additional wage cuts and tax increases. The nation’s two biggest unions were on strike.

EU Meeting

German Chancellor Angela Merkel and French President Nicolas Sarkozy will meet on June 17 in Berlin, with pressure mounting for the leaders to resolve their differences over a rescue for Greece. EU finance ministers agreed yesterday to convene again on June 19 after they failed to reconcile a German-led push for bondholders to share part of the cost of a new plan for Greek aid.

The euro has depreciated 0.8 percent in the past week against nine other developed-nation currencies, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar has risen 1.8 percent.

Sterling weakened as the Office for National Statistics reported that the U.K.’s jobless claims rose by 19,600 in May after a revised 16,900 increase in the prior month. The median forecast of 22 economists in a Bloomberg News survey was for an increase of 6,500. The pound lost 1.1 percent to $1.6194.

U.K. Confidence

U.K. consumer confidence jumped the most in 5 1/2 years in May, figures from the Nationwide Building Society show. Nationwide’s index of sentiment gained 11 points to 55, the highest in five months. The pound touched 87.51 pence per euro, the strongest since June 1.

The Standard & Poor’s 500 Index fell 1.7 percent, and the Thomson Reuters/Jefferies CRB Index of commodities fell 2.3 percent. Canada’s dollar declined 1.1 percent to 97.91 cents per U.S. dollar.

Norway’s krone dropped 0.8 percent to 7.8717 per euro, and the Swedish krona lost 0.3 percent to 9.1811 per euro.

The consumer-price index increased 0.2 percent, compared with the 0.1 percent median forecast of economists surveyed by Bloomberg News, figures from the Labor Department showed today in Washington. The core measure, which excludes more volatile food and energy costs, climbed 0.3 percent, the biggest increase since July 2008.

The Federal Reserve Bank of New York’s general economic index dropped to minus 7.8, the lowest level since November, from 11.9 in May. The median forecast in a Bloomberg News survey of economists was 12. Industrial production in the U.S. rose 0.1 percent in May after no change the prior month, figures from the Fed showed today.

The Dollar Index, which measures the greenback against the currencies of its six major trade partners, rose 1.7 percent to 75.578, the biggest gain since August.

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