ECONOMY

Euro drops most in 14 months on Cyprus

The euro slid the most in 14 months against the dollar on Monday after an unprecedented levy on bank deposits in Cyprus threatened to throw Europe back into crisis.

The single currency fell to a two-week low versus the yen after Cypriot President Nicos Anastasiades bowed to demands by regional finance ministers to raise 5.8 billion euros by imposing losses on the island’s depositors.

The yen strengthened against all 16 of its major peers. The New Zealand dollar and Mexican peso weakened as investors sold higher-yielding currencies. The euro pared losses as declines in Italian and Spanish government bonds were limited.

“The measure makes people nervous that this may happen to other countries in the future and there could be a flight of capital out of the region,” said Mansoor Mohi-uddin, head of currency strategy at UBS AG in Singapore. “This adds to our bearish view on the euro, and we expect the currency’s downtrend to begin again.”

The euro slid 1 percent to $1.2945 at 7.54 a.m. in New York local time (1.54 p.m. in Greece) after dropping as much as 1.5 percent, the biggest decline since January 13, 2012. The common currency slumped 1.3 percent to 123.01 yen after falling to 121.15, the weakest level since March 5. The yen gained 0.3 percent to 95.03 per dollar.

Scenes of Cypriots lining up at cash machines raised the specter of capital flight elsewhere and threatened to disrupt a market calm that settled over the 17-member currency bloc since the European Central Bank’s pledge in September to backstop troubled nations’ debt. A parliamentary vote on the deposit levy scheduled for Monday had been postponed.

The terms of Cyprus’s bailout are negative for depositors across Europe, and may hurt bank ratings region-wide, Moody’s Investors Service said in a Credit Outlook report on Monday.

“There’s concerns about the dangerous precedent that this sets in terms of other so-called depositors guarantees,” said Annette Beacher, head of Asia-Pacific research at TD Securities Inc. in Singapore. “It’s the de-facto break-up of the euro in the fact that having money in a Cyprus bank isn’t worth as much as having money in any other bank.”

The euro trimmed declines as the impact of developments in Cyprus had relatively limited impact on short-maturity Italian and Spanish bonds, said Arne Rasmussen, head of currency research at Danske Bank A/S in Copenhagen.

“There’s buying on dips after the euro’s significant move and some people are taking a wait-and-see stance ahead of the parliamentary vote,” Rasmussen said. “Cyprus is a major concern in our view but I think the near-term recovery of the euro was driven by the fact that losses in Italian and Spanish debt were fairly small.”

Italy’s 10-year bond yield increased eight basis points to 4.67 percent after rising as much as 21 basis points. Spain’s climbed 10 basis points to 5.02 percent.

The euro has weakened 1.3 percent during the past month, the second worst performer after Norway’s krone of 10 developed- nation currencies tracked by Bloomberg Correlation-Weighted Indexes. It has still strengthened 2.3 percent in the previous six months.

“The issue is whether to believe that the Cyprus levy on depositors is one-off, but depositors and investors elsewhere could easily see this as another in a string of ‘one-offs’ and react badly,” Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York, wrote in a note to clients. The euro will be sold against a range of currencies including the dollar, Swiss franc and pound, he wrote.

The 17-nation euro tumbled 0.9 percent to 85.72 pence and dropped 0.3 percent to 1.2238 francs.

The concern in Cyprus “moves risk-on trade to backseat,” Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, wrote on Twitter. “Sell euro as well,” he said.

[Bloomberg]