The euro fell to a six-month low versus the dollar and the yen rallied as Germany prepared plans to shore up the nation’s banks with credit-default swaps showing a more than 90 percent probability that Greece won’t meet its debt commitments.
The yen strengthened against the euro as investors sought the Japanese currency as a haven, even as Greek officials said the nation is committed to “full implementation” of its bailout agreement. The 17-nation euro weakened amid speculation the region’s central bank will dilute a proposal to wean distressed banks off its emergency funding. The Dollar Index headed for the biggest weekly gain since May 2010 after President Barack Obama detailed his $447 billion plan to boost hiring.
“Greece coming out and denying is not going to have any effect whatsoever on people’s thinking,” said John Curran, a senior vice president in Toronto at CanadianForex Ltd., an online foreign-exchange dealer. “All these countries were denying that they had issues to begin with. So please, let’s take the rose-colored glasses off.”
The euro depreciated 1.6 percent to $1.3656 at 5 p.m. in New York, after dropping to $1.3627, the lowest level since Feb. 22. The currency has slumped 3.9 percent this week, the most since the period ended July 2010.
The yen weakened 0.1 percent to 77.61 per dollar after strengthening as much as 0.5 percent. The yen rose 1.5 percent to 105.99 per euro, touching the strongest level since January 2001.
Dollar Rallies
“There is a lot of chatter right now that Greece may default over the weekend,” said Charles St-Arnaud, a foreign- exchange strategist at Nomura Holdings Inc. in New York. “A lot of investors are reducing their exposure and trying to find cover in case something happens over the weekend.”
The Dollar Index, which tracks the greenback versus the currencies of six U.S. trading partners, gained for a second day, adding 1.3 percent to 77.199. It earlier reached 77.276, the highest level since March 11. The gauge had a 3.3 percent weekly gain, the most since the period ended October 2008.
The seven-day relative strength index for the gauge reached 82.14, trading above the 70 level for the second day. A reading above 70 signals an asset may have risen too quickly and may be due for a reversal. The euro’s seven-day relative strength fell below 30 for the second day signaling it may have declined too fast and may reverse.
Futures Bets
Futures traders increased their bets that the euro will decline against the U.S. dollar, figures from the Washington- based Commodity Futures Trading Commission show.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 36,443 on Sept. 6, compared with net shorts of 384 a week earlier.
Axel Merk, president and chief investment officer at Merk Investments LLC, said his firm sold $90 million of euros yesterday after European Central Bank President Jean-Claude Trichet took a “more dovish tone.”
Merk Investments manages more than $860 million in assets and runs the Merk Hard Currency Fund. Merk disclosed the sale in a note today.
ECB Policy
The European Central Bank left its benchmark rate at 1.5 percent yesterday and cut its 2011 and 2012 growth forecasts at a policy meeting in Frankfurt.
The implied yield on Euribor futures for June slid seven basis points to 0.96 percent, showing traders were adding to wagers for lower borrowing costs. Investors should be “on alert” for a potential 50 basis-point cut in ECB rates, Barclays Plc economists Julian Callow and Francois Cabau wrote in an investor report yesterday.
Greek bond yields reached record highs as the country endeavors to show it can reach budget-cutting targets to receive financial aid. Credit-default swaps insuring Greek sovereign bonds jumped 212 basis points to a record 3,238, according to CMA.
The country rejected default talk as “organized speculation,” according to an e-mailed statement from the finance ministry as German Chancellor Angela Merkel’s government is preparing an emergency plan to help banks that face a possible 50 percent loss on their Greek bonds. Ilias Mosialos, a Greek government spokesman, said the payment of a sixth loan tranche under a European Union and International Monetary Fund bailout agreed in May of last year isn’t at risk.
Basis Swaps
The cost of converting euro-based payments into dollars, as measured by the one-year cross-currency basis swap, fell 6.6 basis points to 65.7 basis points below the euro interbank offered rate, or Euribor, indicating a higher premium to buy the greenback, according to data compiled by Bloomberg.
The euro had a weekly decline of 1 percent against nine developed nation currencies, according to the Bloomberg Correlation-Weighted Indexes. The Swiss franc declined 8.9 percent this week and the New Zealand dollar fell 0.1 percent.
“Whenever there are things like ‘Greece is not doing enough’ is said, that is when people get the most scared because of a possibility they may not get the next tranche of aid,” said Brian Kim, a currency strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc. “Periphery concern has continued to be the overarching theme.”
Krone Falls
Norway’s krone was the biggest loser against the dollar falling to a four-week low of 5.5512, before trading at 5.5465. The Standard & Poor’s 500 Index declined 2.7 percent and the S&P GSCI Index of raw materials slumped 1.5 percent.
Demand for the yen was tempered before finance ministers from the Group of Seven nations meet today in Marseille, France, to discuss ways to bolster their economies. Japanese Finance Minister Jun Azumi said before departing from Tokyo that he would appeal to the group to appreciate his concern about excessive yen gains.
Japan has intervened in the currency markets three times in the past 12 months to weaken the yen, with the last operation being a 4.51 trillion-yen action in August, the largest monthly amount since March 2004. The yen went on to reach 75.95 per dollar on Aug. 19, a postwar record.
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