Euro at 12-Year Low Versus Yen on Crisis; Dollar Drops on Fed

The euro fell for a fourth straight week against the yen, touching the lowest level in almost 12 years, as signs the European debt crisis is worsening damped demand for the shared currency.

The dollar dropped against most major peers as investors added to bets the Federal Reserve will take new steps to stimulate economic expansion that may debase the currency. Data next week is forecast to show U.S. growth slowed. Australia’s dollar climbed as implied volatility fell to an almost five-year low and traders sought higher yields, while the euro slid even as European officials approved an aid package for Spanish banks.

“Uncertainty has increased in the region, giving investors another reason to shun the euro,” Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co., said in a telephone interview. “There’s an underlying hope that we could see another round of global stimulus, which is giving investors a reason to pile into higher-yielding assets.”

The 17-nation currency fell 1.6 percent to 95.43 yen yesterday in New York, from 96.98 yen on July 13. It touched 95.35 yen, the weakest since November 2000. The euro declined for a third week versus the dollar, losing 0.8 percent to $1.2157 and reaching $1.2144 yesterday, its weakest since June 2010. The yen advanced for a fourth week against the dollar, its longest winning stretch in a year, gaining 0.9 percent to 78.49.

Net Shorts

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 167,249 on July 17, compared with net shorts of 165,705 a week earlier. Net shorts reached a record 214,418 June 8.

The euro sank to the lowest level since 2008 versus the pound and the weakest on record against the Australian dollar as Spanish borrowing costs approached a euro-era high, fueling speculation Europe’s fiscal turmoil will broaden. The currency remained above its lifetime average of $1.2087, calculated from Jan. 1, 1999, when it began trading, through yesterday.

European finance ministers’ approval yesterday of as much as 100 billion euros ($122 billion) of aid for Spanish banks failed to keep yields on Spain’s 10-year government debt from rising above 7 percent, the threshold level for global bailouts of Greece, Ireland and Portugal. Prime Minister Mariano Rajoy forecast a second year of recession and Valencia became the first region to say it would seek a rescue from the nation.

Yield Gap

Ten-year Spanish bond yields climbed to 7.284 percent yesterday, almost matching the euro-era record 7.285 percent they touched a month ago. The difference between Spanish and German 10-year yields widened to a record 613 basis points, or 6.13 percentage points.

Sterling appreciated 1 percent to 77.83 pence per euro. It reached 77.71 pence yesterday, the strongest since October 2008.

“The market is more concerned about Spain going down the same route as Greece, looking for a sovereign bailout,” Dean Popplewell, an analyst in Toronto at the online currency-trading firm Oanda Corp., said yesterday in a telephone interview. “It doesn’t paint a rosy picture for capital markets.”

Greece, where Europe’s debt crisis began in 2009, was the first euro member to get a rescue package.

Risk Adjusted

The euro’s risk-adjusted loss of 0.69 percent against the dollar this year was the largest among major currencies, the Bloomberg Riskless Ranking showed. The Aussie was the fourth-worst performer, falling 0.16 percent.

The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.

Japan’s currency rose versus the greenback as the extra yield investors receive for investing in U.S. two-year debt versus comparable Japanese government bonds dropped, limiting dollar-denominated assets’ appeal. The yield gap was 10 basis points yesterday, compared with 28 basis points on March 20.

Demand for refuge from Europe’s financial turmoil drove government-debt yields to record lows in the U.S., the U.K., Canada, France, Germany and the Netherlands this week.

The yen climbed 8.6 percent over the past three months versus nine developed-nation counterparts tracked by Bloomberg Correlation-Weighted Indexes, the best performance. The euro slumped 5.2 percent, the worst. The U.S. and Australian dollars each gained 4.1 percent.

Bernanke ‘Prepared’

The greenback fell against most major counterparts after Fed Chairman Ben S. Bernanke reiterated to Congress this week policy makers are “prepared to take further action as appropriate to promote a stronger economic recovery.” The Fed bought $2.3 trillion of securities from 2008 to 2011 in two rounds of a tactic called quantitative easing.

Growth in U.S. gross domestic product slowed to 1.4 percent from April through June, a Bloomberg News survey forecast before the Commerce Department reports the data July 27. The figure compares with 1.9 percent in the first quarter and 3 percent in the last three months of 2011. Data this week showed unexpected drops in retail sales and Philadelphia-region manufacturing.

“The markets are inching toward expectations that the Fed will have to do something in terms of a policy initiative, whether that’s QE3 or something else,” Robert Sinche, global head of currency strategy at Royal Bank of Scotland Plc’s RBS Securities unit in Stamford, Connecticut, said on July 19. “They’re moving in that direction, which is more broadly dollar-negative.”

Aussie Climbs

Australia’s dollar was the best-performing major currency, rallying 1.5 percent to $1.0378 and gaining 0.6 percent to 81.46 yen. The Aussie rose to A$1.1705 per euro yesterday, a record.

The implied volatility of three-month options on Group of Seven currencies touched 8.32 percent yesterday, the least since November 2007, a JPMorgan Chase & Co. measure showed. Lower volatility makes investments in currencies with higher benchmark lending rates more attractive because the risk in such trades is that market moves will erase profits. The average over the past five years is 12.4 percent.

Australia’s cash target rate is 3.5 percent, while the U.S. benchmark rate is zero to 0.25 percent.

South Africa’s rand weakened against the greenback after the nation’s central bank unexpectedly cut its key interest rate on July 19 to 5 percent, from 5.5 percent. The rand declined 0.3 percent to 8.2868 per dollar.

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