Euro Falls to Decade Low Versus Yen on Debt Concern; Kiwi Drops

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September 26, 2011, 5:29 AM EDT By Garth Theunissen and Masaki Kondo

Sept. 26 (Bloomberg) -- The euro slumped to a decade low against the yen and the weakest in eight months versus the dollar on concern European policy makers are struggling to resolve the debt crisis as the region’s economy slows.

The 17-nation euro fell for the sixth time in seven days against Japan’s currency as Greece awaited a decision on its next round of rescue funding. The euro pared losses after a German report showed business confidence fell less than economists forecast. The dollar and yen gained amid concern the euro area’s debt woes will drive up funding costs. New Zealand’s currency dropped for a sixth day, the longest losing streak since September 2008.

“The lack of a coordinated policy response to the debt crisis is pushing the euro down,” said Derek Halpenny, London- based European head of currency research at Bank of Tokyo- Mitsubishi UFJ Ltd. “The risk of contagion remains very high and the failure to deal with Greece means that the euro can only go lower.”

The euro dropped 0.5 percent to 102.85 yen at 9:51 a.m. in London after declining to 101.94, the weakest level since June 2001. The shared currency depreciated 0.3 percent to $1.3462 after sliding to $1.3363, the lowest since Jan. 18. The yen appreciated 0.2 percent to 76.43 per dollar.

Finance ministers and central bankers who held weekend talks in Washington, where the International Monetary Fund and World Bank had their annual meetings, urged European officials to intensify efforts to contain their 18-month debt crisis as Greece teetered on the edge of default.

‘Cascading Default’

U.S. Treasury Secretary Timothy F. Geithner called on governments to unite with the European Central Bank to boost the capacity of their bailout fund, saying failure to act threatened “cascading default, bank runs and catastrophic risk.” Former U.S. Treasury Secretary Lawrence Summers said he has been to 20 years of IMF gatherings, and “there’s not been a prior meeting at which matters have had more gravity and at which I’ve been more concerned about the future of the global economy.”

“There needs to be a global coordinated plan put in place to address the debt crisis and the capitalization of banks to re-instill faith in the world’s financial system,” Bank of Tokyo’s Halpenny said. “Without that, Europe will keep coming up short.” The euro may decline to as low as $1.25 by year-end, he said.

Euro-region finance ministers won’t be in a position to decide on the disbursement of the next tranche of aid to Greece when they meet on Oct. 3 because a report by the IMF, ECB and European Commission has been delayed, German Deputy Finance Minister Joerg Asmussen said yesterday.

‘Getting Worse’

“The situation surrounding Europe’s fiscal problems seems to be getting worse,” said Tohru Sasaki, head of Japan rates and foreign-exchange research at JPMorgan Chase & Co. in Tokyo. “Investor risk aversion is likely to stay elevated and the yen and, to a lesser extent, the dollar will probably be bought.”

The yen and dollar have gained about 3 percent over the past week, the best performers among 10 developed-nation currencies, according to Bloomberg Correlation-Weighted Indexes. In the past three months, the yen has gained 11 percent the dollar has gained 4.8 percent and the euro has lost 1.2 percent.

German business confidence fell less than economists forecast in September, suggesting the economy may avoid recession. The Ifo institute in Munich said its business climate index dropped to 107.5 from 108.7 in August. Economists forecast a decline to 106.5, according to a Bloomberg News survey.

Above Average

For all the concern about sovereign default in Europe, the euro remains above its average since being created almost 12 years ago, a sign that foreign-exchange traders see little chance of a collapse as officials step up efforts to keep the debt crisis from expanding.

At last week’s close of $1.35, the euro is 12 percent stronger than its average of $1.2024 since January 1999. While strategists have cut their forecasts for appreciation, they still see it rising to $1.43 by the end of 2012, based on the median of 35 estimates in a Bloomberg survey.

Futures traders increased bets the euro will weaken against the dollar, figures from the Washington-based Commodity Futures Trading Commission showed last week. The difference in the number of wagers by hedge funds and other large speculators on a drop in the euro versus those on a gain was 79,460 on Sept. 20, compared with net shorts of 54,459 a week earlier.

New Zealand’s dollar fell for a sixth day versus the greenback and yen after a report showed the country’s trade deficit was wider than estimated, adding to signs of a slowdown in the South Pacific nation.

Imports exceeded exports by NZ$641 million ($494 million) in August, Statistics New Zealand said today. Economists forecast a NZ$321 million deficit.

“Risk will still be on the back foot -- markets will be very, very cautious,” said Khoon Goh, head of market economics and strategy at ANZ National Bank Ltd. in Wellington. “The kiwi is sitting right on a quite crucial support level. If it doesn’t hold, we’re looking at potentially a move lower.”

The New Zealand dollar dropped 0.2 percent to 77.49 U.S. cents after falling to 76.38 U.S. cents, least since April 1.

--With reporting by Ron Harui and Kristine Aquino in Singapore and Mariko Ishikawa and Monami Yui in Tokyo. Editors: Nicholas Reynolds, Daniel Tilles

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Garth Theunissen in London gtheunissen@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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