Euro Down to Weakest Level in 2 Years on Economic Outlook

The euro dropped to the lowest weekly level versus the dollar in more than two years as investors sought safety amid concern Europe’s sovereign-debt turmoil is worsening.

The yen rose for a third week against the greenback, the longest winning stretch in almost a year. The euro pared its loss versus the dollar yesterday amid speculation global central banks will take further action to sustain faltering economic growth. Federal Reserve Chairman Ben S. Bernanke will testify to Congress next week about the U.S. outlook.

“For the majority of the week the theme was largely risk-off,” Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in a telephone interview yesterday. “There were questions and doubts about the timely implementation of any plan to help arrest the debt crisis.”

The euro declined 0.3 percent $1.2249 yesterday in New York, from $1.2291 on July 6 and the lowest on a weekly basis since June 11, 2010. The shared currency dropped 0.9 percent to 96.98 yen. The Japanese currency appreciated 0.6 percent to 79.18 per dollar, completing its longest stretch of five-day gains since the four weeks ended July 29, 2010.

Futures traders added to bets the euro will fall against the dollar, Commodity Futures Trading Commission data showed. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 165,705 on July 10, compared with net shorts of 146,177 a week earlier. It reached a record of 214,418 June 8.

Finance Ministers

The euro slid this week even as European officials laid the groundwork for possible purchases of Italy’s bonds and fast-tracked aid for troubled Spanish banks to help stem the debt crisis. Finance ministers at a two day meeting in Brussels that ended July 10 worked out a way for the euro bailout funds to intervene in bond markets and said the first 30 billion euros ($37 billion) flowing to Spanish banks this month.

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., said the shared currency is destined for failure and must be reworked if it is to remain alive.

“It can’t survive with the present rules,” Buffett said yesterday on Bloomberg Television’s “In the Loop With Betty Liu” in an interview from the Allen & Co. media conference in Sun Valley, Idaho. “That’s what they’re learning. The question is, can 17 countries get together in a way to essentially re-do something?”

ECB Policy

The European Central Bank is prepared to ease monetary policy, including cutting its deposit rate further, if Europe’s debt crisis worsens, according to a Medley Global Advisors report obtained yesterday by Bloomberg News.

Slowing growth in China fueled bets policy makers will boost stimulus there. Premier Wen Jiabao said after the nation announced its second interest-rate cut in a month last week that the government will intensify fine-tuning of policies in response to downside risks to economic growth.

Bernanke is scheduled to deliver his semiannual report on the economy and monetary policy to the Senate Banking Committee on July 17. He will testify on the report to the House Financial Services Committee the next day.

Higher Yield

The euro dropped against the majority of its 16 most-traded peers and reached record lows against the Australian and Canadian dollars as investors sold the shared currency to invest in higher-yielding assets. Benchmark interest rates in Australia and Canada are 3.5 percent and 1 percent, compared with 0.75 percent in the euro zone.

“The euro is now the main funding currency, and everyone wants to be short euro,” said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York. “The dollar is no longer the main funding currency.” A short position is a bet a currency will weaken.

Implied volatility on three-month options for Group-of-Seven currencies fell to 9.2 percent, the lowest since May 4, according to the JPMorgan G7 Volatility Index. The average over the past year is 11.5 percent. Lower volatility makes investments in currencies of nations with higher benchmark rates more attractive because the risk in such trades is that market moves will erase profits.

Japan’s currency rose versus the dollar as the extra yield investors receive for investing in U.S. Treasury two-year debt versus comparable Japanese government bonds fell to the lowest in five months, limiting dollar-denominated assets’ appeal. The yield spread was 13 basis points, or 0.13 percentage point.

Best Performance

The yen gained 6.1 percent over the past three months, the best performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar rose 3.5 percent, while the euro was the biggest loser, dropping 3.7 percent.

The dollar’s losses were limited after minutes of the Fed’s June meeting released on July 11 disappointed speculators who had bet policy makers would signal a need for more monetary stimulus. Only two participants said additional bond purchases, a move that may debase the currency, were appropriate.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six U.S. trade partners, touched a two-year high of 83.829 on July 12. The gauge was little changed for the week at 83.349.

Sterling advanced against most of its major counterparts this week as investors bet an attempt to ease U.K. credit conditions will help spur Britain’s economy.

Lending Program

The pound reached its strongest since November 2008 versus Europe’s shared currency after the Bank of England released details yesterday of a new lending program it said may boost credit to companies and households by at least 80 billion pounds ($124 billion). Sterling touched 78.57 pence to the euro and ended the week at 78.65 pence, up 0.9 percent.

Australia’s dollar reached a record A$1.1935 against the euro July 11 amid speculation that China, the nation’s biggest trade partner, will move to boost growth. The Aussie ended the week at A$1.1979 per euro, up 0.4 percent. It gained 0.1 percent to $1.0226 for the week and fell 0.5 percent to 80.97 yen.

The Mexican peso climbed against all of its most-traded peers, and the Canadian dollar gained versus most, as crude oil rose. The commodity is Canada’s biggest export and Mexico’s second-biggest. Crude for August delivery increased 3.2 percent to $87.11 a barrel in New York.

The peso gained 0.8 percent to 13.2904 per dollar. It touched 13.2404 on July 10, the strongest since May 8.

The Canadian dollar strengthened 0.5 percent to C$1.0141 to its U.S. counterpart. It climbed to C$1.2378 per euro yesterday, a record, and ended the week at C$1.2422, up 0.8 percent.

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