May 29 Bloomberg – The euro declined, headed for a sixth monthly loss against the dollar, amid concerns European measures to reduce fiscal deficits and contain the region’s sovereign debt crisis will undermine the global recovery.
The 16-nation currency erased last week’s gain against the greenback as Fitch Ratings yesterday stripped Spain of its AAA credit grade, saying the nation’s debt burden is likely to weigh on economic growth. European leaders announced on May 10 an almost $1 trillion package to backstop the region’s debt crisis. The dollar gained against the yen before a report next week forecast to show the U.S. economy added 508,000 jobs in May.
“The crux, core problem is incredible indebtedness in the peripheral countries” of Europe, said Win Thin, senior currency strategist at Brown Brothers Harriman & Co. in New York. The European aid package “just kicks the can down the road. Any rally we’ve seen in the euro has been short term. We’re in a multi-year bear market.”
The euro declined 2.4 percent this week to $1.2273 from $1.2570 on May 21, after gaining 1.7 percent. The common currency has declined 7.7 percent in May, and is on track for the longest monthly losing streak since April 2000. It fell 1.2 percent over the past five days to 111.77 yen, from 113.13. The dollar gained 1.2 percent against the yen to 91.93, from 90.
Fitch cut Spain’s grade one step to AA+ and assig
ned it a “stable” outlook, according to a statement from London. Spain has held the top rating since 2003.
Budget Cuts
The downgrade “reflects Fitch’s assessment that the process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium term,” according to the rating company.
Spain’s parliament on May 27 approved the country’s deepest budget cuts in 30 years by a single vote, casting doubt on the future of the government as Prime Minister Jose Luis Rodriguez Zapatero seeks to garner support for his 2011 budget. Spain has the third-largest budget deficit in the euro region.
Greek unions called strikes earlier this month to protest against austerity measures agreed to by Prime Minister George Papandreou in return for the bailout from the euro region and the International Monetary Fund.
“People are still fundamentally bearish longer term on the euro,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “The market has not been thrilled with how the crisis has been handled. There is still a threat that the economic recovery could be derailed.”
Naked Short-Selling
The Australian dollar declined 11.1 percent in May to 77.17 yen and Mexico’s peso fell 7.8 percent to 7.027 yen as concerns that global growth was slowing spurred investors to reduce carry trades, in which they borrow money in countries with low interest rates to invest in higher-yielding assets. Japan’s benchmark lending rate of 0.1 percent makes the yen a popular choice for funding such trades.
In an effort to calm the region’s financial markets, German regulator BaFin issued a ban against naked short-selling and speculation on euro-area government debt with credit default swaps that took effect on May 19 and lasts until March 31, 2011. Germany has been unable to persuade other nations to follow its prohibition, which also applies to shares of 10 banks and insurers. The euro slid that day to a four-year low of $1.2144.
‘The European Situation’
“One factor weighing on the euro is a lack of coordination between its members,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The markets are losing confidence in euro zone leaders and their ability to navigate their way through the crisis.”
Group of 20 finance ministers may discuss the effect of the European sovereign debt crisis on currencies at next week’s meeting in South Korea, Japanese Finance Minister Naoto Kan said.
“Some nations may have an interest in discussing currencies,” Kan said at a news conference in Tokyo yesterday. “Discussion of the impact of the European situation on currencies will be on the main agenda,” as well as financial regulation and developments in the global economy, he said.
Europe’s currency has slumped 8 percent this year against its major counterparts, according to Bloomberg Correlation- Weighted Currency Indices, weakening on concern rising government budget deficits will lead to defaults and an eventual breakup of the euro region. The dollar has appreciated 9.31 percent, while the yen advanced 12.1 percent.
Morgan Stanley on May 27 lowered its year-end forecast for the euro to $1.16 from $1.24 on concern the sovereign-debt crisis in Greece is now a European one.
“The initial fiscal problem in the periphery (Greece) has now become a fiscal problem for core Europe,” Morgan Stanley’s Stephen Hull in London wrote in a report. “More importantly for the euro, it has also undermined the credibility” of the European Central Bank.
The ECB said on May 10 it would start buying public- and private-sector debt as part of a bid to halt the fiscal crisis and rescue the euro, an action that it had previously said it wasn’t considering.