Euro falls by most in 3 weeks as Cyprus seeks plan to save banks

The euro fell by the most in three weeks versus the dollar as Cyprus sought to secure a bailout of its banking system and as data suggested economic growth in the region that shares the currency is failing to accelerate.

The pound gained for a second week against the greenback as some Bank of England policy makers said further easing may cause “unwarranted” currency weakness. The yen appreciated by the most since November as Bank of Japan Governor Haruhiko Kuroda failed to announce fresh stimulus. A March 28 report may show the US economy grew at a 0.5 percent annual rate in the fourth quarter.

“In terms of headline risk, clearly Cyprus has been dominant,” Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York, said in a telephone interview yesterday. “For the euro, we had disappointing numbers. The euro has been quite resilient, and I think actually the most remarkable aspect is that the euro has held up quite well, despite all the negative news.”

The euro fell 0.7 percent to $1.2989 and touched $1.2844 on March 19, the weakest level since Nov. 22. It fell 1.5 percent to 122.73 yen. The yen gained 0.9 percent to 94.46 per dollar.

European and Cypriot officials were locked in talks to find a formula to avert the Mediterranean island’s financial collapse, struggling to forge consensus on a bailout package before the European Central Bank cuts funding.

Reduced risk

Policy makers’ patience with Cyprus is running out after Cypriot lawmakers rejected a plan to tax bank deposits agreed on last weekend by the 17 euro-area finance ministers.

Cyprus’s House of Representatives yesterday approved the passage of legislation to allow capital controls and to create a “solidarity” investment fund.

“The No. 1 thing that stands out this week is how well the euro appears to have traded around this $1.2880 level that we’ve been watching,” Brian Daingerfield, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a telephone interview yesterday. “Markets aren’t particularly concerned that Cyprus is a systemic risk to the euro zone.”

Europe’s common currency gained as much as 0.9 percent against the dollar yesterday, the biggest jump since March 7, and climbed versus most of its 16 most-traded peers.

A composite index based on a survey of purchasing managers in the euro-region services and manufacturing industries fell to 46.5 from 47.9 in February, London-based Markit Economics said March 21. Analysts had forecast a reading of 48.2, according to the median of 23 estimates in a Bloomberg survey. A reading below 50 indicates contraction.

‘Just awful’

“The growth outlook remains just awful for Europe, so I fully expect the ECB to be easing within a month or two,” Richard Franulovich, chief currency strategist at Westpac Banking Corp. in New York, said in a Bloomberg radio interview yesterday. “Whatever short-term relief we might see, I fully expect the euro to be trading lower in coming days.”

The ECB has kept its benchmark interest-rate unchanged at 0.75 percent since July 2012. Following the PMI figures, JPMorgan Chase & Co. economist Greg Fuzesi said the company cut its 2013 euro-area economic growth forecast to a 0.6 percent annual contraction from a 0.2 percent decline and is “penciling” in a June borrowing-cost reduction by the central bank.

UK Chancellor of the Exchequer George Osborne held firm to his austerity plan as the economy continues to stagnate, saying government spending cuts will carry on for three years after the 2015 election. Osborne announced a new mandate for the central bank, though he kept its 2 percent inflation target. The pound whipsawed during the chancellor’s speech.

Fading expectations

The majority on the Monetary Policy Committee said that with inflation above the BOE’s 2 percent target, there was a risk that adding to stimulus “might also lead to an unwarranted depreciation of sterling if it were misinterpreted as a lack of commitment to maintaining low inflation in the medium term,” according to minutes of their March 7 meeting.

Sterling gained 0.8 percent to $1.5230, its second weekly advance. The currency touched $1.4832 on March 12, its weakest level since 2010.

England’s “budget announcement and the new Bank of England mandate, and the first press conference by Mr. Kuroda at the Bank of Japan, I think they probably fell short of the very dovish expectations,” BNP’s Serebriakov said. “We saw both the sterling and the yen strengthening. It’s more a reflection of how dovish the market expectations have become.”

‘Weaker yen’

BOJ chief Kuroda, speaking in his first press conference, restated that he will do whatever it takes to achieve a 2 percent inflation target and that he may bring forward open- ended asset purchases. He declined to comment on whether he will call an emergency meeting before the April 3-4 policy gathering.

“The trend of a weaker yen should continue,” Daingerfield said. “Our overall view is that Kuroda and the leadership at the BOJ will be pushing through some strong easing in April.”

Europe’s shared currency fell 1 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen weakened 0.5 percent, while the dollar rose 0.8 percent.

The Federal Reserve signaled gains in employment aren’t yet sufficient for policy makers to move closer to reducing stimulus measures. The central bank said the nation’s unemployment rate will hit its threshold for raising interest rates sometime in 2015.

Dollar gains

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six US trade partners, rose 0.1 percent to 82.38. The measure is forecast to end the year at 81.6, according to the median estimate of 14 economists surveyed by Bloomberg.

Gross domestic product expanded at an annual rate of 0.5 percent in the last three months of 2012, according to the median forecast of 54 economists surveyed by Bloomberg, after increasing 0.1 percent in the previous quarter.

“There’s a growing camp of market players that see scope for less stimulus by the end of the year,” Joe Manimbo, a market analyst at Western Union Business Solutions, a unit of Western Union Co., said in an interview yesterday in New York. “At the same time, it’s going to take a big dip in the jobless rate.” [Bloomberg]

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