Euro Falls Before EU Summit as Merkel Rejects Joint Bonds

Japanese Prime Minister Yoshihiko Noda
Yoshihiko Noda, Japan's prime minister. Photographer: Junko Kimura/Pool via Bloomberg

The euro weakened before a European Union summit later this week and as Italy and Spain prepare to sell debt tomorrow amid concern Europe’s fiscal crisis is infecting bigger economies.

The 17-nation currency extended last week’s 0.5 percent drop versus the dollar as Moody’s Investors Service cut the ratings on 28 Spanish banks, citing a weakening of the Spanish government’s creditworthiness. The euro fell earlier as German Chancellor Angela Merkel rejected joint euro-bloc bonds or bills and the nation of Cyprus requested bailout funding from European authorities. The yen strengthened on demand for haven assets as stocks slid.

“The Merkel comments and the request by Cyprus for a bailout from the broader international community have caused investors to lean towards a more conservative trading angle,” said Ravi Bharadwaj, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co. “Most traders and major investment participants are curtailing their larger positions before this week’s euro-zone meetings.”

The euro declined 0.5 percent to $1.2504 at 5 p.m. New York time after touching $1.2471, the least since June 12. It tumbled 1.5 percent to 99.62 yen. The Japanese currency strengthened 1 percent to 79.66 per dollar after depreciating to 80.62, the weakest level since April 27.

Both Europe’s common currency and the yen have fallen 3.5 percent against the dollar this year. Japan’s currency has gained 0.1 percent on the euro.

Commodity Currencies

Commodity-linked currencies such as the Canadian and Australian dollars dropped today against most major peers as futures for crude oil fell after dropping last week.

India’s currency pared a gain as the government raised the ceiling on the amount of rupee-denominated government bonds overseas investors can hold.

The Standard & Poor’s 500 Index fell 1.6 percent and the MSCI World Index of shares dropped 1.4 percent. The Dollar Index, which tracks the U.S. currency against those of six trading partners, advanced 0.2 percent.

The shared currency is down from this year’s high of $1.3487 on Feb. 24 and has depreciated 2.5 percent this year, the most among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar has risen 1.5 percent and the yen has fallen 2.4 percent.

Debt Sales

Italy is scheduled to sell inflation-linked securities maturing in September 2016 and September 2026 tomorrow, along with as much as 3 billion euros ($3.8 billion) of May 2014 zero-coupon notes. Spain will offer three- and six-month bills the same day. The yield on Italy’s two-year note jumped 54 basis points, or 0.54 percentage point, to 4.33 percent today, with the equivalent-maturity Spanish rate 42 basis points higher at 4.85 percent.

France and Italy are urging Germany to take decisive action to end the debt crisis, now in its third year, after Spain’s 10-year bond yields jumped to more than 7 percent last week.

The two-day EU summit in Brussels starting June 28 is the first meeting of European leaders since Greek parliamentary elections on June 17. New Democracy leader Antonis Samaras became prime minister on his pledge to seek relief from austerity measures imposed on the country while keeping the bailout funds flowing. The Greek leader won’t attend the meeting this week after undergoing eye surgery.

“We expect Germany to hold their stance about not wanting debt mutualization or any sort of common bond,” Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a telephone interview. “The realization set in over the weekend that we’re not going to get anything more than what leaders have already talked about in terms of a growth pact.”

Trend Lower

The euro will likely trend lower during the remainder of June and hit $1.22 by the end of the month, Camilla Sutton, chief currency strategist at Bank of Nova Scotia’s Scotia Capital unit Toronto, wrote in a note today. The EU summit is unlikely to provide a long-term solution to Europe’s problems, she wrote.

The shared currency will drop to $1.20 by year-end as Europe’s debt crisis worsens, according to State Street Corp., which oversees $16.9 trillion in custody assets. Investors should sell the 17-nation euro and buy the U.S. dollar, said Collin Crownover, head of State Street’s currency management in Boston, Massachusetts.

“There are fairly low expectations,” Richard Franulovich, a New York-based senior currency strategist at Westpac Banking Corp., said of the European summit in a telephone interview. “I don’t think you’re going to see anything concrete that’s going to contain markets in the short run. There are a lot of reasons to be cautious on the euro.”

Bearish Bets

Options traders have cut bearish bets on the euro. The one-month risk-reversal rate had a 1.29 percentage point premium in favor of euro puts relative to calls on June 21, the smallest since May 1. The fall in the premium, which was 1.39 percentage points today, signals a relative decrease in the demand for options that profit if the euro declines against the dollar. Calls grant the right to buy the common currency.

“Running into last week there was a degree of optimism ahead of the EU leaders summit at the end of this week,” Derek Halpenny, European head of global currency markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, said in a telephone interview. “It’s become clear over the weekend by the tone of the German comments, we’re not going to get anything that results in any kind of ground-breaking policy momentum. That’s the reason why we’re seeing this reversal today. It’s supportive of the U.S. dollar.”

Rand, Loonie

Prime Minister Yoshihiko Noda’s Democratic Party of Japan is struggling to overcome internal resistance to his proposal to double the sales tax. The lower house of parliament will vote on the consumption tax-bill tomorrow, DPJ lawmaker Koichi Takemasa told reporters today.

A split in the DPJ amid the tax vote “could lead to the government falling, pushing up dollar-yen further,” Mansoor Mohi-uddin, head of foreign-exchange strategy in Singapore at UBS AG, wrote in an e-mailed note on June 23.

South Africa’s rand fell against all of its major peers, extending its slide to three days, after Citigroup Inc. cut China’s growth forecast over European debt concern. The rand declined 1 percent to 8.4847, after Citigroup said China’s economy may grow 7.8 percent this year, compared with a previous estimate of 8.1 percent, reflecting “anemic” domestic activity in the second quarter and further weakening of European demand.

The Canadian dollar fell 0.5 percent to C$1.0292 after dropping to its lowest level in almost two weeks. The Aussie sank 0.5 percent to $1.0011 after touching 99.69 U.S. cents, its lowest level in more than a week.

Rupee Gains

India’s government raised the ceiling on the amount of rupee-denominated government bonds overseas investors can hold by $5 billion to $20 billion, the central bank said in a statement today. The rupee, which touched a record low of 57.3275 per dollar on June 22, has fallen 6.9 percent this year, the worst performer among the 10 most-traded currencies in Asia.

The rupee advanced 0.2 percent to 57.0150 after trading as much as 1.3 percent stronger prior to the announcement, according to data compiled by Bloomberg.

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