Euro Touches 2-Year Low Before Finance Ministers Meet

The euro fell to its lowest level in two years against the dollar as regional finance ministers gather in Brussels to discuss crisis-fighting measures adopted by heads of government at a summit last month.
The 17-nation currency erased its intraday drop as the European Commission said future recapitalizations of banks by rescue funds wouldn’t require government guarantees. The yen reached a one-month high versus the euro as stock declines amid increased demand for haven assets. Australia’s dollar weakened after China’s inflation eased to a 29-month low and Japanese machinery orders had their biggest drop since 2001.

“We got a lot of negative commentary early from the Far East, with Japanese machinery orders and China CPI,” Andrew Busch, a global currency strategist at Bank of Montreal in Chicago, said in a telephone interview. “All of the bad things happened early, and the market caught itself and started to come back. We haven’t seen any follow-on news flow that’s been consistently negative.”

The euro slid to $1.2251, the weakest since July 2010, and was little changed at $1.2301 at 8:50 a.m. New York time. The shared currency bought 97.86 yen after earlier touching 97.43, the lowest level since June 5. Japan’s currency strengthened 0.1 percent to 79.55 per dollar.
Equities Weaken

The Stoxx Europe 600 Index of shares lost 0.3 percent, while the MSCI Asia Pacific Index (MXAP) dropped 1.5 percent.

Australia’s currency slid after the official Xinhua News Agency reported yesterday that Chinese Premier Wen said the government will intensify fine-tuning of policies in response to downside risks to growth. The comments came after the South Pacific nation’s biggest trading partner announced the second interest-rate cut in a month.

Consumer prices in China rose 2.2 percent in June from a year earlier, according to a report released today. That’s the slowest pace in 29 months and compares with the median forecast for a 2.3 percent inflation rate in a Bloomberg poll.

The Aussie declined 0.3 percent to $1.0182 and fell 0.5 percent to 80.99 yen.

Spanish and Italian bonds fell amid concern finance ministers will fail to agree on sufficient crisis-fighting measures to stem the euro area’s woes.
Europe’s Banks

Recapitalizations of banks by the European Stability Mechanism will have “no need for a sovereign guarantee,” commission spokesman Simon O’Connor told reporters in Brussels today. Details of how the future system will work remain to be negotiated, he said.

“We have to move quickly on banking supervision and we have to move quickly on the direct recapitalization of Spanish banks,” French Finance Minister Pierre Moscovici said yesterday.

European Central Bank President Mario Draghi was speaking in Brussels after the central bank cut the main refinancing rate to a record 0.75 percent and lowered the deposit rate to zero on July 5. He said after last week’s decision that the cut may have only a “muted” economic impact and growth in the euro area “continues to remain weak with heightened uncertainty.”

Deutsche Bank AG, the biggest foreign-exchange trader according to Euromoney Institutional Investor Plc (ERM), forecast the euro will drop to $1.20 in the coming months.
ECB Moves

Last week’s rate cut “implicitly signals a greater ECB easing bias and a desire for a lower euro,” George Saravelos, a currency strategist in London, wrote in an e-mailed report dated July 6. The deposit-rate cut will help “to push euro-dollar down toward 1.20 over the summer months,” he wrote.

The euro earlier slid to the lowest against the Australian and New Zealand dollars since the 17-nation currency was created in January 1999, dropping to A$1.20053 and NZ$1.5356. It fell to a two-year low versus the Canadian dollar of 1.24657 and the weakest level since November 2008 against the pound at 79.04 pence.

“The euro group has to provide a lot of nuts and bolts to what had been decided at the European Union summit,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt. “If they decide something meaningful those who like it might buy euro-dollar up cautiously, but they will be disappointed as they had been last week by those who are more skeptical” pushing the currency lower.
Machinery Orders

Europe’s shared currency reached $1.1877 on June 7, 2010, the weakest since 2006, according to data compiled by Bloomberg. The euro has fallen 3.3 percent in the past three months, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen was the biggest gainer in the period, rising 6.5 percent followed by a 3.7 percent increase in the dollar.

The yen tends to appreciate in periods of financial and economic turmoil because Japan’s current-account surplus makes it less reliant on foreign capital. Government data showed the surplus was 215.1 billion yen in May, compared with the median estimate for an excess of 493.1 billion yen in a Bloomberg News survey of economists. Machinery orders, an indicator of capital spending, slumped 14.8 percent in May from April, the Cabinet Office said in a separate report.

Bank of Japan (8301) policy makers are set to meet on July 11-12. Governor Masaaki Shirakawa has said the central bank is fully committed to pursuing “powerful monetary easing” until a 1 percent inflation target set in February is in sight. The central bank has expanded its asset-purchase fund, its main policy tool, by 20 trillion yen this year, in a bid to stimulate growth.

Citigroup Inc. forecast the BOJ to leave policy unchanged, currency strategist Osamu Takashima wrote in a report today.

“Among Japanese economists, it’s expected that the BOJ will expand the size of its asset-purchase program,” Takashima wrote. “Should the BOJ surprise the market, it could be associated with a somewhat stronger yen.”

The Dollar Index (DXY), which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trade partners, fell 0.2 percent to 83.247, after a 2.1 percent advance last week.