Wednesday, May 12, 2010

Euro Falls for Second Day on Concern Debt Crisis to Slow Growth

May 12 (Bloomberg) -- The euro fell for a second day against the dollar amid concern the region’s most-indebted nations will struggle to contain their deficits, slowing Europe’s economic recovery.

The 16-nation currency weakened versus 13 of its 16 major counterparts before a German report that may show the recovery in Europe’s largest economy stalled for a second quarter. The pound traded near a 10-month high against the euro after Conservative leader David Cameron struck a deal with Britain’s third-largest party to form a coalition government, easing concern over a hung parliament.

“Each nation in the euro zone still has to work on rebuilding its finances,” said Nobuaki Kubo, vice president of foreign exchange in Tokyo at BBH Investment Services Inc., a unit of New York-based Brown Brothers Harriman & Co. “Optimism about the loan package didn’t last long as investors stopped pushing up the euro. People remain skeptical about the euro’s outlook in the medium and long term.”

The euro fell to $1.2644 as of 9:40 a.m. in Tokyo from $1.2662 in New York yesterday. The currency traded at 117.28 yen from 117.32 yen. The dollar was at 92.72 yen from 92.65 yen.

The single currency climbed as high as $1.3094 on May 10 after euro zone leaders announced an agreement to provide loans of as much as 750 billion euros ($949 billion), including support from the International Monetary Fund.

‘Find Faults’

Greece’s budget deficit of 13.6 percent of gross domestic product is the second-highest in the euro zone after Ireland’s 14.3 percent. As part of the bailout plan, Spain and Portugal also pledged deeper deficit reductions than previously planned.

“As markets began to find faults with the loan package, it’s become clear that this will not solve the roots of the crisis,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “Investors are finding fewer reasons to buy the euro.”

Germany’s gross domestic product was unchanged in the first quarter from the prior three months, according to a Bloomberg News survey before the Federal Statistics Office report today.

U.S. President Barack Obama and Spain’s Prime Minister Jose Luis Rodriguez Zapatero yesterday talked about the need for Spain to take “resolute action.”

‘Not a Panacea’

Federal Reserve Chairman Ben S. Bernanke told U.S. senators yesterday that the euro region’s aid package to stem its debt crisis isn’t a cure-all, according to a participant.

“He said, ‘This is basically not a panacea,’” and that the measures are “temporary,” Alabama Senator Richard Shelby, the senior Republican on the Banking Committee, told reporters in Washington after a closed-door briefing Bernanke held with the panel. “There’s got to be fundamental underlying changes in their economies, not just Greece, but a lot of other countries,” Shelby cited Bernanke as saying.

The euro has lost 8.2 percent this year, according to Bloomberg Correlation-Weighted Indices. The dollar has gained 5.5 percent, and yen has advanced 5.8 percent.

The pound rose yesterday against the dollar and the euro as Cameron replaced Gordon Brown after five days of talks following elections May 6 that failed to produce a majority for the first time since 1974. His coalition partner, Nick Clegg, head of the Liberal Democrats, became deputy premier.

‘Reduces Risk’

“Cameron is now the new U.K. prime minister, which reduces the risk of policy error,” analysts led by Hans-Guenter Redeker, London-based global head of foreign-exchange strategy at BNP Paribas SA, wrote in a note today. “While much of the move in the pound is now priced in by traders, there is still a potential for euro-sterling to break below 84 pence and the pound to move higher.”

The coalition government will propose 6 billion pounds ($8.97 billion) of cuts within 50 days to reduce a record budget deficit, raise the threshold to pay income tax, study a split between retail and investment banking and increase the Bank of England’s oversight of the financial industry, Conservative officials said.

The pound traded at 84.83 pence per euro from 84.66 pence yesterday. The currency climbed to 84.28 pence on May 6, the strongest level since June 22, 2009.

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