Euro Declines Before Summit on Debt Concern; Swiss Franc Rises to Record

Bloomberg

By Masaki Kondo - Jul 18, 2011 9:05 AM GMT+0300

The euro fell the most in a week against the dollar and slid to a record versus the Swiss franc on concern European leaders will fail to agree on measures to contain the region’s debt crisis at a summit this week.

The 17-nation currency dropped for the first time in four days versus the yen after European Central Bank President Jean- Claude Trichet reiterated his opposition to any restructuring of Greek debt. The franc strengthened for a seventh day against the euro and the dollar as a decline in Asian stocks boosted demand for safer assets. Australia’s dollar weakened for a third day as traders added to bets the central bank will cut interest rates over the next 12 months.

“I’ll be bearish on the euro this week,” said Imre Speizer, a strategist in Auckland at Westpac Banking Corp., Australia’s second-largest lender. “There’s now a track record of talking but not actually deciding doing anything, so I think the market is now skeptical that anything comes out of these meetings or summits.”

The euro dropped to $1.4075 as of 6:58 a.m. in London from $1.4157 inNew York last week, the biggest decline since July 11. The currency slid 0.7 percent to 111.20 yen, and weakened 0.9 percent to 1.1434 Swiss francs after sliding to a record low 1.1374. The franc gained 0.4 percent to 81.23 centimes per dollar after reaching an all-time high of 80.33. The dollar traded at 79.02 yen from 79.13 yen.

Brussels Summit

Euro-area leaders will meet in Brussels on July 21 to discuss the “financial stability” of the region, European Union President Herman Van Rompuy said in an e-mailed statement on July 15. The second summit in a month follows a worsening of the crisis that pushed Italy to the attention of investors and drove bond yields to euro-area records across Europe’s most debt-laden nations.

Italian 10-year bond yields surged above 6 percent last week, approaching the 7 percent mark that prompted its smaller euro partners to seek bailouts. Yields on notes from Ireland, Portugaland Greece soared to euro-era records.

“If a country defaults, we can no longer accept as normal eligible collateral defaulted bonds issued by the government of that country,” Trichet said in an interview with the Financial Times Deutschland, according to a transcript released by the Frankfurt-based ECB.

The euro fell even after the European Banking Authority said July 15 that only eight of the 90 banks failed its stress tests. Regulators didn’t include a Greek default in the tests.

‘Skepticism’

“It is skepticism regarding the result of the European stress-testing exercise,” said Sacha Tihanyi, a Hong Kong-based senior currency strategist at Scotia Capital. “It perhaps is not being seen as having sufficient rigor.” The “illiquidity” of the currency market amplified the slide in the euro, he said.

Japan’s financial markets were shut today for a holiday.

The franc strengthened versus all of its 16 major counterparts on speculation the euro region’s debt crisis will slow global growth.

“There’s a lot of fear and uncertainty,” said Adam Carr, a senior economist at ICAP AustraliaLtd. in Sydney. “Against this backdrop, ‘safe-haven’ currencies are likely to be bought,” such as the franc, he said.

The MSCI Asia Pacific Excluding Japan Index of shares dropped for a third day, losing 0.4 percent.

While the Swiss National Bank highlighted its ability last week to resume sales of the currency to stem gains that threaten overseas sales at companies including ABB Ltd., traders are pushing the franc higher. Strategists boosted their fourth- quarter median forecasts for the franc against the dollar by the most of 51 pairs tracked by Bloomberg.

Dollar Index

The Dollar Index gained amid optimism U.S. politicians will be able to reach an agreement on increasing the government’s $14.3 trillion debt ceiling.

“I believe they will be able to reach a compromise at the last minute -- it’s all about negotiation,” Ding Yifan, deputy director of the Institute of World Development, said in a telephone interview in Beijing today. The organization is part of the Development Research Center, operating under the State Council, China’s cabinet.

China is the biggest foreign holder of Treasuries. U.S. President Barack Obama and leaders of Congress face an Aug. 2 deadline to raise the debt limit.

The Dollar Index, which tracks the U.S. currency against those of six major trading partners, rose 0.4 percent to 75.434.

Confidence the U.S. will avoid default has kept the 10-year Treasury yield near record lows. Ten-year notes yield 2.91 percent, versus an average of 4.06 percent over the past decade.

Aussie Weakens

Australia’s dollar declined versus most of its major counterparts before the central bank releases minutes tomorrow of its July board meeting.

Traders are betting the Reserve Bank of Australia will lower its benchmark rate by 54 basis points over the next 12 months, compared with a prediction for 14 basis points of cuts a week ago, a Credit Suisse Group AG index showed today.

“There’s already a 30 percent chance of a rate cut priced for August 2” when the central bank holds a policy meeting, John Kyriakopoulos, head of currency strategy at National Australia Bank Ltd. in Sydney, wrote in a report today.

The Australian currency fell 0.5 percent to $1.0602, and lost 0.6 percent to 83.74 yen.

To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editor responsible for this story: Nicholas Reynolds atnreynolds2@bloomberg.net