Euro Drops Against Dollar After Moody’s Downgrades Spanish Debt

Euro Declines as Moody’s Says France’s Rating Under Pressure
The euro fell after Moody’s said yesterday that France’s Aaa credit rating is under threat from worsening debt metrics and the potential for additional liabilities from the regional crisis. Photographer: Chris Ratcliffe/Bloomberg

The euro dropped against the dollar after Moody’s Investors Service cut Spain’s government bond ratings, fueling concern the region’s debt crisis will spread.

The 17-nation currency earlier gained after the Guardian newspaper reported Germany and France support boosting the region’s rescue fund to 2 trillion euros ($2.8 trillion). A spokesman for German Chancellor Angela Merkel declined to comment. The dollar fell against the Australian and Canadian currencies as stocks and commodities rallied, damping demand for a refuge.

“We have continued concern about the sovereign debt crisis in the euro zone,” said Kathy Lien, director of currency research at the online trading firm GFT Forex in New York. “Everyone is paring long exposure they’ve created in the euro-dollar in the last two weeks because we’ve gotten nothing positive.” A long is a bet an asset will gain in value.

The euro appreciated 0.1 percent to $1.3742 at 5:31 p.m. in New York after earlier rising 0.6 percent. The euro gained 0.1 percent to 105.56 yen. Japan’s currency was little changed at 76.83 versus the dollar after advancing as much as 0.3 percent.

Japan’s currency erased its gain versus the dollar after the Nikkei newspaper reported that the government and central bank will form a team of senior officials to oversee steps designed to address the currency’s strength.

The yen rallied to a post-World War II high of 75.95 against the dollar in August, making Japan’s exports more expensive. It gained even after the government intervened in the currency market for the third time in the past year, selling the yen in an effort to curb its appreciation.

Boost in Aussie

The dollar fell 1 percent to $1.0263 per Australian dollar and slid 0.9 percent to C$1.0141 against the Canadian currency today as stocks and commodities advanced.

The Standard & Poor’s 500 Index rose 2 percent after dropping as much as 0.8 percent. The S&P GSCI Total Return Index of 24 raw materials increased 0.7 percent as crude oil for November delivery surged 2.4 percent to $88.36 a barrel.

Global demand for U.S. stocks, bonds and other financial assets was greater than forecast in August, the Treasury Department reported. Net buying of long-term equities, notes and bonds totaled $57.9 billion during the month, compared with net buying of $9.1 billion in July.

Spain’s government bond ratings were downgraded two levels to A1 from Aa2, with a negative outlook, by Moody’s, the ratings company said in a statement.

The euro advanced versus the dollar as the Guardian reported that the two biggest economies in the currency area agreed before the weekend summit to an increase in the 440-billion euro European Financial Stability Facility.

Support for Banks

Germany and France have also supported recapitalizing the region’s banks to meet a 9 percent capital ratio that may be required by the European Banking Authority, the newspaper said.

The two nations have yet to agree on how to bolster the European bailout fund as they seek to overcome technical hurdles and to complete a plan to stem to debt crisis, said a person with direct knowledge of the talks.

The euro fell earlier after Moody’s Investors Service said yesterday France’s Aaa credit rating is under threat from worsening debt metrics and the potential for additional liabilities from the regional debt crisis. France’s 10-year notes trail those of Greece, Belgium and Ireland this quarter.

Merkel said today that the European Union summit will mark an important step, though not the final one, in solving the euro-area debt crisis.

Debt has built up over decades, and the summit will produce a “clear commitment” to the euro by the region’s leaders, Merkel told reporters in Berlin after a meeting with Uruguayan President Jose Alberto Mujica.

Dashed ‘Dreams’

Europe’s currency dropped yesterday as a Merkel spokesman knocked down what it called “dreams” that the Oct. 23 summit would resolve the debt crisis. Christian Noyer, head of France’s central bank, ruled out a ramping up of the European Central Bank’s bond-buying program to help shield countries such as Italy and Spain from contagion.

“Everything seems hinged on what happens in Europe,” said Jessica Hoversen, an analyst at the futures broker MF Global Holdings Ltd. in New York. “The market is uncertain and concerned. It has become very binary in these periods of elevated stress.”

Among Group-of-10 currencies, the Australian dollar will come under the most pressure against its U.S. counterpart as the rally in higher-yielding assets reverses, according to Brown Brothers Harriman & Co.

‘Screamingly Overvalued’

Strong domestic economic fundamentals will not support a “screamingly overvalued” Australian dollar, Mark McCormick, a currency strategist at Brown Brothers in New York, said in a telephone interview.

The Aussie’s price is further above its 20-day moving average than any other G-10 currency, according to McCormick. It’s followed by the New Zealand dollar.

Asian currencies dropped today as growth in China’s gross domestic product slowed to 9.1 percent in the third quarter from a year earlier after an expansion of 9.5 percent in the prior three months.

South Korea’s won dropped 0.5 percent to 1,145.65 per dollar, and the Malaysian ringgit fell 1.1 percent against the greenback to 3.1353.

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