BL: Euro Declines Against Dollar as Spain Takes Over Lender
By Matthew Brown and Yoshiaki Nohara
May 24 (Bloomberg) -- The euro dropped the most versus the dollar in four days after the Bank of Spain took over a failing regional lender.
The pound rose versus the euro as the U.K. announced $9 billion in spending cuts to contain the budget deficit. Yuan forwards rose the most in four days as President Hu Jintao said China will move gradually and independently in making changes to its exchange-rate mechanism. The euro fell against all of its most-traded counterparts as investors sold the currency to fund trades in higher-yielding currencies.
“We are headed for a softer patch of growth, which is hurting the euro today, and is unfavorable for risk assets going forward,” said Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishi UFJ in London. “Risk currencies, such as the Australian dollar, are overvalued.”
The euro fell 1.5 percent to $1.2384 at 6.41 a.m. in New York, from $1.2570 on May 21. It touched $1.2144 on May 19, the lowest level since April 17, 2006. Japan’s yen strengthened 1.3 percent to 111.48 per euro and was little changed at 90.05 per dollar.
The 16-nation euro dropped toward a four-year low against the dollar after the Bank of Spain said on May 22 it appointed a provisional administrator to run CajaSur, a savings bank crippled by property-loan defaults. The lender, based in the city of Cordoba, Spain, and controlled by the Roman Catholic Church, will be run by the government’s bank restructuring fund, the regulator said.
Spain’s ‘Revelations’
“Weekend revelations that the Bank of Spain has acted to support a regional lender are likely to weigh on the euro,” Gareth Berry, a currency strategist at UBS AG in Singapore, wrote in a research note. “This will probably revive concerns about the broader stability of the euro-zone banking system.”
Brazil’s real appreciated 1 percent to 2.3296 versus the euro and South Africa’s rand advanced 1 percent to 9.7736 as the fastest convergence in short-term interest rates in almost a year is making the euro an addition to currencies used to finance investments in higher-yielding assets.
Borrowing in euros to finance an investment in the Australian dollar, New Zealand dollar, Brazilian real and Norwegian krone returned 10 percent in the past 6 months, according to data compiled by Bloomberg. The same trade using the dollar instead of the 16-nation currency resulted in a 7.5 percent loss, and a 7.4 percent decline with the yen.
Europe’s currency has lost 6.7 percent this year, based on Bloomberg Correlation-Weighted Indices. The dollar has risen 9.8 percent, and the yen has advanced 14 percent.
Yuan Forwards
Yuan forwards advanced from near their weakest level in eight months after Hu said as talks with the U.S. opened in Beijing today that China will continue to “steadily advance” reform “under the principles of independent decision-making, controllability and gradual progress.”
Non-deliverable 12-month yuan forwards strengthened 0.2 percent to 6.725, while the yuan was little changed at 6.8287. The forwards traded at to 6.7750 on May 20, the weakest since September 2009.
Sterling rose 0.8 percent to 1.1591 versus the euro as the U.K.’s Chancellor of the Exchequer George Osborne announced 6.25 billion pounds ($9 billion) of spending reductions to contain a budget deficit that is the biggest in the Group of Seven nations. Concern that Britain will struggle to cut the shortfall has contributed to a 3.6 percent decline in the pound this year, according to Bloomberg Correlation-Weighted Indexes.
‘Stay of Execution’
“The market’s giving the new government a reasonable stay of execution, wanting to see how definitive they are in the budget-deficit stakes,” said Jeremy Stretch, a senior currency strategist at Rabobank International in London. “The 6 billion pounds of cuts today are a step in the right direction. For now, markets are cautiously rewarding sterling.”
The Dollar Index rose for the first time in four days, increasing 1.1 percent to 86.310 before U.S. reports forecast to show the housing market is improving and consumers turned the most optimistic in 20 months.
Existing home sales rose to an annual rate of 5.65 million in April, from 5.35 million in March, according to a Bloomberg survey before the National Association of Realtors report today. The Conference Board’s confidence index climbed to 59 this month from 57.9 in April, according to another survey before tomorrow’s data. That would be the highest since September 2008.
“The U.S. is experiencing a V-shaped recovery,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “Against this backdrop, the greenback is likely to be supported.”
To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net
Last Updated: May 24, 2010 07:30 EDT
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