Euro Declines for Third Month as Debt Crisis in Greece Persists

February 27, 2010, 1:07 AM EST | www.businessweek.com

By Inyoung Hwang and Ben Levisohn

Feb. 27 (Bloomberg) -- The euro fell for a third straight month against the dollar, its longest losing streak since November 2008, as Greece’s debt woes weighed on the region’s economic outlook.

“The Greek crisis has had a real macro impact in Europe,” said John Shin, a strategist in New York at Bank of America Merrill Lynch, who expects the euro to trade $1.28 by the end of the year. “Growth forecasts have been pushed down and expectations for a rate hike by the ECB are on hold.”

The euro this month lost 1.7 percent against the dollar and 3.2 percent against the yen.

The euro rose 0.13 percent this week against the greenback, its first weekly gain since Jan. 8. It reached $1.3444 on Feb. 19, its weakest level since May 18. For the week it declined 2.7 percent versus the yen and touched 119.66 on Feb. 25, the first time the currency has fallen below the 120 yen level since Feb. 24, 2009.

‘Being the Worst’

The greenback fell for the first week in three versus the yen as an increase in jobless claims and plunge in consumer confidence tempered speculation the U.S. economy will recover more swiftly than other nations.

The dollar fell 2.8 percent versus the yen this week as initial jobless claims unexpectedly rose by 22,000 to 496,000 in the week ended Feb. 20, according to a Labor Department report on Feb. 25. A report on Feb. 23 showed the Conference Board’s confidence index unexpectedly fell to a 10-month low of 46. first time since Feb. 5.

“On a scale of one to 10 with 10 being the worst, the jobless claims number was a nine,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group LLC in Greenwich, Connecticut. “Every week, we’re looking a move away from 500,000 towards 400,000 and the numbers have started to push back to half a million. That’s not good.”

The euro rose yesterday against the dollar and yen as German officials said aid to Greece may come through KfW Group, a lender owned by the state.

Preparing Measures

KfW is preparing measures that are part of a European plan to grant Greece as much as 25 billion euros ($34 billion) in aid should the need arise, according to four lawmakers, who spoke on the condition of anonymity because the information is confidential.

KfW’s purchase of Greek bonds, backed by German government guarantees, would be an emergency measure as it risks inviting investors to speculate against other euro region countries, the lawmakers said. No decisions have been taken yet, they said.

Greece needs to raise 53 billion euros this year and faces more than 20 billion euros of bond redemptions by the end of May, according to data compiled by Bloomberg. Greece has the cash it needs until the middle of March, Prime Minister George Papandreou told the British Broadcasting Corp. on Feb. 21.

“If Germany is leading this effort, that’s a more credible process from a markets perspective than if other smaller powers were leading it,” said Robert Lynch, head of currency strategy at HSBC Holdings Plc in New York. “There is a perception that if there is an EU effort to support Greece, Germany needs to lead that effort or it won’t take place.”

Further Downgrade

Standard & Poor’s analysts led by Marko Mrsnik in London said in a statement late on Feb. 24 said a further downgrade of Greece of one to two notches is possible within a month. Pierre Cailleteau, managing director of sovereign risk at Moody’s, said in Tokyo on Feb. 25 that Greece faces a downgrade of “a couple of notches” within a few months.

S&P, Moody’s and Fitch downgraded Greece’s credit rating in December as its deficit approached 13 percent of gross domestic product.

The euro halted a six-week slide against the dollar after bouncing off a Fibonacci retracement level that technical analysts say a break below would indicate an extension of the decline to a new percentage level.

The currency rebounded for the third day after it dipped below a retracement level that’s held for nine months. The euro dropped below the $1.3483 level on Feb. 19 that marks the retracement of 61.8 percent of the rally that took it as high as $1.5144 on Nov. 25. A break lower would have pushed the euro as low as $1.3090, the chart indicates.

‘Dodge the Bullet’

“It can dodge the bullet,” said Andrew Chaveriat, a technical analyst at BNP Paribas SA in New York. “This whole downtrend is losing a little bit of steam here, we’re more oversold now than we were at the Lehman Brothers collapse.”

Brazil’s real was the top performer against the dollar this month among the 16 major currencies, rising 4.8 percent. It has also been the best performer versus the yen. The pound had the sharpest decline against the dollar in February among the major currencies, falling 4.6 percent.

The pound posted its biggest weekly slide against the euro since Sept. 25 as Bank of England policy makers signaled further measures may be needed to boost the U.K.’s ailing economy.

“Right now, sterling is weakest out of the G-10” currencies, said Lane Newman, director of foreign exchange at ING Groep NV in New York. “Regardless of what the market thinks, reserve managers would rather hold euro over sterling. The U.K. arguably has bigger problems than the euro zone.”

--With assistance from Oliver Biggadike in New York. Editors: James Holloway, Dave Liedtka