02 Mar 2009
March 2 (Bloomberg) -- The euro fell to a one-week low against the dollar after European Union leaders rejected calls to back an aid package for eastern Europe, fueling concern the financial crisis will deepen the region's recession.Europe's single currency dropped for a second day versus the greenback as EU leaders vetoed Hungary's proposals for 180 billion euros ($227 billion) of loans to ex-communist economies in eastern Europe. The Dollar Index climbed to a 2 1/2-year high as declines in Asian stocks stoked demand for safety. New Zealand's currency slid to the weakest level in 6 1/2 years after its Treasury Department said the economy may contract more than expected this year.
"There's disappointment that nothing really concrete came out of the EU's weekend meeting and their failure to address eastern Europe's problems," said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. "The bias is for the euro to be sold."
The euro fell to $1.2579 as of 7:40 a.m. in London from $1.2669 late in New York late last week. It reached $1.2546, the weakest level since Feb. 19. The European currency dropped to 122.87 yen from 123.61 yen and traded at 88.39 British pence from 88.51 pence.
The euro may weaken to $1.2528 today, Soma said.
The yen traded at 97.50 per dollar from 97.57 on Feb. 27. It climbed 1.3 percent to 48.28 against New Zealand's dollar and gained 0.5 percent to 62.01 versus Australia's dollar. Japan's currency rose to a record 16.34974 against South Korea's won from 15.77687 late in Asia last week.
The ICE's Dollar Index, which tracks the greenback versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, strengthened to 88.822, the highest since April 2006.
‘Very Different'
The euro declined for a second day versus the yen after EU leaders also told automakers such as General Motors Corp.'s European arm to look to national governments for help.
"I would advise against taking huge numbers into the debate," German Chancellor Angela Merkel said to reporters at an EU summit held in Brussels yesterday. "I see a very different situation -- you can compare neither Slovenia nor Slovakia with Hungary."
Government steps to stabilize the credit and money markets have "appeared to gain traction" in recent months, the Bank for International Settlements said today in its quarterly report. At the same time, "signs of dysfunction continued," the Switzerland-based BIS said.
The U.S. and Japanese currencies strengthened as Asian equities slumped, with the Nikkei 225 Stock Average falling 3.8 percent and the MSCI Asia-Pacific Index of regional shares dropping 3.5 percent.
Risk Aversion
"Risk aversion is re-emerging, so the dollar and the yen are being bought," said Yuji Saito, head of the foreign- exchange group in Tokyo at Societe Generale SA, France's third- largest bank. "Investors appear to be repatriating funds."
Implied volatility on one-month euro-yen options rose to 23.76 percent from 23.38 percent last week, suggesting a greater risk of exchange-rate fluctuations that can erode profit on so- called carry trades.
In carry trades, investors get funds in a country with low borrowing costs and invest in another with higher rates. The risk is that market moves can erase those profits. Japan's benchmark interest rate is 0.1 percent, compared with 3.25 percent in Australia and 3.50 percent in New Zealand.
Australian Rates
Australia's central bank will lower rates to 3 percent or less at a meeting tomorrow, according to 14 of the 18 economists surveyed by Bloomberg News. New Zealand policy makers will lower benchmark borrowing costs by at least 0.75 percentage point on March 12, a separate Bloomberg survey showed.
The Australian dollar fell 0.4 percent to 63.64 U.S. cents, and the New Zealand dollar declined 1.2 percent to 49.50 cents after touching 49.12 cents, the lowest since November 2002.
The U.S. currency also advanced on speculation the deepening global financial crisis is spurring banks to restrict lending abroad.
"Whenever a banking system realizes it's in big trouble, it says, ‘I have to take care of my next door neighbors and the businesses down the block,'" said John Taylor, who manages $11.4 billion as chairman of New York-based FX Concepts Inc. "Then that currency of that country, if its banks are big in international lending like in the U.S., will strengthen."
Evidence of so-called financial protectionism surfaced last week. Stephen Hester, chief executive officer of Royal Bank of Scotland Group Plc, said Feb. 26 that the U.K.'s largest government-controlled bank will cut back or withdraw from 36 of 54 countries where it operates to focus on its "heartland."
‘More Unwinding'
The yen may extend losses from its worst month in 13 years on speculation traders will keep reducing long positions in the currency, according to Standard Chartered Plc.
"With the yen continuing to weaken, we would expect to see more unwinding of yen long positions in the coming weeks," analysts led by Callum Henderson, Singapore-based head of global currency strategy at Standard Chartered, wrote in a research note today.
Figures from the Washington-based Commodity Futures Trading Commission showed on Feb. 27 the difference in the number of wagers by hedge funds and other large speculators on a gain in the yen compared with those on a drop -- so-called net longs -- was 28,635 on Feb. 24, compared with net longs of 36,188 a week earlier. A long position is a bet an asset will rise.
Japan's currency weakened 7.9 percent versus the dollar in February, the poorest month since August 1995.
