The euro had its biggest loss versus the yen, since September, as European borrowing costs at almost euro-era records sapped confidence the region’s governments will be able to deal with their debt crisis.
The 17-nation currency rose for the week against the New Zealand and South African currencies amid reports talks may start on the European Central Bank lending to the International Monetary Fund for sovereign bailouts. The US dollar gained against all of its 16 most-traded peers but the yen, as investors sought safety, sending stocks and commodities lower, as a November 23 deadline loomed for Congress’s deficit-reduction supercommittee.
“Sovereign spreads have become a huge risk barometer, more so than equities,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York, said yesterday. “You need to see a meaningful decline in Italian benchmark yields before the market and the euro can think about shrugging this off.”
The euro slid 2 per cent to 104 yen in its biggest weekly decline since September 23. It dropped for a third consecutive week versus the dollar, losing 1.6 per cent to $1.3525. The greenback fell 0.4 per cent to 76.91 yen and touched 76.58 yesterday, the weakest level, since reaching a post-World War II low of 75.35 yen on October 31.
The European currency pared losses for the week, as Italian government bond yields fell below 7 per cent, the threshold at which Greece, Ireland and Portugal sought bailouts, after the ECB purchased the debt. Ten-year yields declined yesterday to 6.64 per cent.
YIELD PREMIUM
The extra yield investors demand to lend to Italy rather than Germany for 10 years was 5.29 percentage points on November 15, after reaching a euro-era record of 5.53 percentage points on November 9 on concern Europe’s debt crisis would spread. The gap narrowed yesterday to 4.67 percentage points.
The ECB bought larger-than-usual quantities of Italian debt November 16 and 17 and yesterday, according to people with knowledge of the trades. They declined to be identified as the deals are private. Several also said the bank purchased Spanish bonds. An ECB spokesman declined to comment.
“There is very much the story of the broadening of contagion to the core,” Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York said November 16. “We’re still in a market where any kind of longer-term player is much more comfortable selling on the euro upside than buying the downside.”
The euro slid 1.2 per cent over the past six months versus nine developed-nation peers tracked by Bloomberg Correlation- Weighted Currency Indexes as European leaders struggled to contain the sovereign debt crisis. The yen gained 9.7 per cent and the dollar rose 4.3 per cent.
RISK DEMAND EBBS
New Zealand’s dollar, nicknamed the kiwi, and South Africa’s rand were the biggest losers against the euro among its major counterparts as the European turmoil sapped risk demand. The kiwi tumbled 3.7 per cent to 75.65 US cents, and the rand dropped 3.2 per cent to 8.1975 per dollar.
The Standard & Poor’s 500 Index retreated 3.8 per cent, and the S&P GSCI Index of raw materials dropped 2.6 per cent.
The franc fell versus the dollar and euro, sinking 1.9 per cent to 91.66 centimes to the greenback and slipping 0.2 per cent to 1.2398 per euro. It has depreciated 10 per cent against the euro and 14 per cent versus the dollar since September 5, the day before the Swiss National Bank imposed a ceiling at 1.20 per euro to stem franc gains, which were hurting exporters.
“The Swiss National Bank just has more credibility, because they’ve said they’ll do whatever it takes, and the market really believes them,” Eric Viloria, senior currency strategist at Gain Capital Group LLC in New York said November 15.
