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Merk Cuts Euro to Lowest Ever in Hard Currency Fund: Tom Keene

Merk Investments LLC cut the euro position of its Hard Currency Fund to 14 percent, the lowest in the fund’s six-year history, citing the need for more banking system support in Europe amid the region’s crisis.

“Only when the banking system is secure enough, that’s when the market is going to quiet down,” Axel Merk, the president and chief investment officer of the eponymous firm, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “As long as there’s no focus, we’ll get this grinding down.”

European leaders should consider nationalizing some of the region’s more troubled banks as a way to contain the turmoil, Merk said. He oversees $800 million in four currency funds at the Palo Alto, California-based company and also spoke in a Dec. 9 telephone interview. The Hard Currency Fund, which bets on 11 currencies against the dollar, was as much as 48.6 percent positioned in the euro at its inception in May 2005.

The euro dropped 1.3 percent to $1.3386, the biggest intraday drop since Nov. 23.

Dexia SA, the Paris- and Brussels-based bank, is being broken up after running out of short-term funding. It was rescued by the governments of France, Belgium and Luxembourg in October for the second time in three years, obtaining as much as 45 billion euros ($60.6 billion) in guarantees from the three nations to cover its financing needs until the end of May.

The European Central Bank, the Federal Reserve and four other central banks agreed last month to cut the cost of dollar funding to financial institutions after the costs surged to the highest level since October 2008.

‘Creditwatch Negative’

While the three-month cross-currency basis swap has fallen to 1.28 percentage points below the euro interbank offer rate, from as high as 1.63 percentage points on Nov. 30, it is still above the 0.07 percentage points reached in May.

Moody’s Investors Service said today it will review the ratings of European Union nations after last week’s summit failed to produce decisive steps to end the debt crisis.

Standard & Poor’s put the EU’s AAA rating on “creditwatch negative” last week after similar action on 15 of the 17 euro nations, pending the outcome of last week’s summit and the actions of central bankers.

The euro won’t drop significantly, Merk said, because slowing global growth and the region’s crisis will prompt central banks of other countries to ease more than the ECB.

“This is a global problem, not a European problem,” Merk said. “These global markets are very much interlinked.”

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