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Euro Falls Most in Two Months on Crisis; Dollar Gains as Haven

The euro tumbled the most in two months versus the dollar as Greek political wrangling threatened to unravel a plan to stem Europe’s debt crisis and global leaders balked at writing new checks to bail out the region.

The 17-nation currency touched a three-week low versus the greenback as Greek Prime Minister George Papandreou called for, and then called off, a referendum on a bailout needed to prevent a default. The dollar rose against all of its 16 most-traded peers as investors sought safety and Japan moved to stop the yen’s advance. U.S. consumer confidence improved, data next week may show.

“Greece remains the focus,” said Andrew Cox, a currency strategist at Citigroup Inc. in New York. “The event that rocked the markets pretty hard was news that Papandreou was calling the confidence vote and referendum. It hit an already fragile market and was the defining event of the week.”

The euro depreciated 2.5 percent to $1.3792 in its first weekly loss since the five days ended Oct. 7. The drop was the biggest since the currency fell 3.9 percent in the week ended Sept. 9. The currency touched $1.3609 on Nov. 1, the weakest level since Oct. 12. The yen declined 0.6 percent to 107.88 per euro. The dollar strengthened 3.2 percent to 78.24 yen, its biggest weekly gain since April, after touching 75.35 yen on Oct. 31, the lowest level since World War II.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major trade partners including the euro and yen, rose 2.4 percent to 76.911.

Stocks tumbled as risk appetite faded. The Standard & Poor’s Index lost 2.5 percent in its first weekly drop since September. It gained 11 percent in October, the most since 1991.

ECB Rate Cut

The euro slumped to almost a three-week low on Nov. 3 just after the European Central Bank, in Mario Draghi’s first meeting as president, unexpectedly cut its key interest rate a quarter-percentage point to 1.25 percent. He said the euro region is headed toward a “mild recession.”

The reduction followed two quarter-percentage point increases earlier this year as former ECB President Jean-Claude Trichet attempted to quell rising inflation.

German Chancellor Angela Merkel said yesterday on the final day of a Group of 20 summit in Cannes, France, that global leaders failed to agree on International Monetary Fund resources to buttress the region’s efforts to contain the debt crisis. They’re awaiting more details on a week-old European rescue plan before they commit cash to the IMF, she said. French President Nicolas Sarkozy said it may take until February for a deal.

Irritation with Europe

The refusal of major economies to stump up money now reflected irritation with Europe’s failure to resolve its crisis alone. Greek politicians tried to map out a plan to put in place a new government to ratify the European Union bailout agreement as Papandreou faced a confidence vote.

European leaders are attempting to keep Greece’s debt crisis from spreading to other countries such as Italy and Spain. Yields on Italian 10-year bonds reached 6.404 percent yesterday, the highest since the euro was introduced in 1999.

“There are real issues in Europe, and a plan for Greece just isn’t going to do it because you have Italy and Spain, banks needing funding, a central bank that’s lowering rates, which all spell negativity for the euro,” said Brian Taylor, chief currency trader at Manufacturers & Traders Trust in Buffalo New York. “The dollar is going to be a beneficiary.”

The dollar dropped 3.6 percent over the past month against nine developed-nation counterparts, according to Bloomberg Correlation-Weighted Currency Indexes. The European currency appreciated 0.4 percent.

Japan Intervenes

The greenback climbed the most since 2008 versus the yen on Oct. 31 as Japan stepped into foreign-exchange markets and sold yen to weaken the currency for the third time this year after its gain to a postwar record threatened exporters. The dollar strengthened as much as 4.9 percent.

“The yen is no longer a safe-haven instrument to buy in times of risk aversion,” Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York, said Oct. 31. “When you do get risk aversion going forward, the dollar is the only true remaining currency that won’t be debauched by authorities.”

The yen and Swiss franc climbed to records this year as investors sought havens. The franc has weakened since Sept. 6, when the Swiss National Bank imposed a ceiling of 1.20 per euro and resumed purchases. It traded yesterday at 1.22 per euro.

Fed Meeting

The dollar dropped on Nov. 2 after the Federal Reserve kept the door open to further steps to prop up the U.S. economy if necessary. While policy makers refrained from taking action, they said “significant downside risks” remain even after the economy picked up in the third quarter.

U.S. employers added 80,000 jobs in October after gains in the prior two months that were revised higher by 102,000, Labor Department data showed yesterday. Economists in a Bloomberg survey forecast a 105,000 increase. The jobless rate fell to a six-month low of 9 percent from 9.1 percent.

The Thomson Reuters/University of Michigan index of consumer sentiment will rise to 61.5, from 60.9 in October, according to a Bloomberg survey forecast before the Nov. 11 report.

Australia’s dollar fell for the first week since September, dropping against most of its major counterparts, after the nation’s central bank cut its key interest rate to 4.5 percent, from 4.75 percent, on Oct. 31. It also cut forecasts for growth and inflation. The Aussie weakened 3 percent to $1.0375.

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