Euro Drops to 10-Year Low Versus Yen on ECB Loans, Debt Concern

The euro dropped against the yen to the lowest level since 2001 as the European Central Bank’s balance sheet soared to a record after it lent regional banks more money last week to keep credit flowing.

The 17-nation currency fell against the dollar to the least since January as concern increased that the region’s sovereign- debt crisis will curb growth, even as rates fell at an Italian bill sale. The dollar gained as stocks dropped, boosting demand for haven assets. The yen strengthened after a U.S. Treasury report criticized Japan for intervening in the currency market and as economic reports signaled slowing economic growth.

“We’re still so far from being out of the woods that even on a day of being positive, people decided that the euro should continue to fall,” said David Mann, regional head of research for the Americas at Standard Chartered Plc. in New York. “It’s quite a sharp rise in the ECB balance sheet. It’s concern about monetization already on the way in Europe.”

The euro dropped 0.9 percent to 100.86 yen at 5:01 p.m. in New York. It touched 100.73 yen, the lowest level since 2001. The shared currency fell 1 percent to $1.2941, touching $1.2912, the least since Jan. 11. The dollar was little changed at 77.90 yen.

Chart Patterns

The common currency’s drop was exacerbated by a break below a support level at $1.3156, according Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in London.

“There’s zero appetite for risk taking and it’s a technically driven environment,” Galy said.

Implied volatility for the currencies of the Group of Seven nations was at 12.08 percent today, according to a JPMorgan Chase & Co. index. It reached a high this year of 15.77 percent in September.

“This is more about year-end, things have been illiquid,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “All it takes is a few orders and a few trades to substantially knock the euro lower.”

The euro has depreciated 1.6 percent this year against nine developed-nation counterparts as Europe’s debt crisis intensified, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar has advanced 1.7 percent and the yen has gained 4.6 percent.

Winners, Losers

South Africa’s rand has declined 19.3 percent against the dollar in 2011, the most of the U.S. currency’s major peers, according to Bloomberg data, followed by Mexico’s peso with an 11.8 percent loss. The yen has advanced 4 percent for the largest gain against the greenback.

The ECB’s balance sheet expanded to a record 2.73 trillion euros ($3.55 trillion). Lending to euro-area banks jumped 214 billion euros to 879 billion euros in the week ended Dec. 23, the Frankfurt-based ECB said in a statement today.

The balance sheet increased by 239 billion euros in the latest period and was 553 billion euros more than three months ago.

Italy sold 9 billion euros of 179-day bills at a rate of 3.251 percent, down from 6.504 percent at the previous auction of similar-maturity debt on Nov. 25. The Treasury also sold 1.7 billion euros of zero-coupon bonds due in September 2013 at a yield of 4.85 percent, versus 7.81 percent on Nov. 25.

The nation will auction as much as 8.5 billion euros of debt due between 2014 and 2022 tomorrow.

Italy’s Debt

Italian 10-year bond yields pared a drop after falling as much as 25 basis points to 6.75 percent. They traded at 6.99 percent, compared with more than 7 percent reached yesterday, the level that spurred Greece, Ireland and Portugal to seek bailouts.

“Europe has to decide what it wants to be, an economic union or a political union, and the way you go about that is fundamentally different,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., in an interview on Bloomberg Television’s “Surveillance Midday” with Pimm Fox. The euro “could get down to perhaps $1.20, $1.25 very briefly on risk aversion, but then we could get back to $1.40, perhaps the upper $1.40s by the end of the year,” he said.

The Treasury Department, in a semi-annual report to Congress on the currency policies of major trading partners, criticized Japan, which unilaterally sold the yen twice in the foreign-exchange market after Group of Seven economies jointly intervened after the March earthquake. The operations in August and October took place when market conditions were orderly and global economic developments were affecting other major currencies as well, the report said.

China’s Role

The report also declined to brand China a manipulator of its exchange rate, while calling the yuan undervalued and vowing to press for further appreciation of the currency. Trading in the currency is limited to a band set daily by the People’s Bank of China. It’s allowed to move 0.5 percent on either side of that rate.

The yen also rose after reports showed industrial production and retail sales dropped more than forecast in November.

Industrial output decreased 2.6 percent in November from the previous month, the trade ministry said in Tokyo today. The median estimate of 29 economists surveyed by Bloomberg News was for output to fall 0.8 percent.

Retail sales fell 2.3 percent last month from the previous year. Economists estimated the measure would be unchanged, according to a separate Bloomberg news survey.

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