By Javier E. David
Broad risk aversion sent the euro sharply lower Wednesday, with the currency battling against the competing forces of Greece’s debt crisis and expectations of higher euro-zone interest rates.
On Tuesday, Federal Reserve Chairman Ben Bernanke’s downbeat assessment of the U.S. economy prompted investors to shun risk-sensitive assets. While halting U.S. growth is an unequivocal negative for the dollar in the long-term, Bernanke’s comments triggered safe-harbor flows into the U.S. currency, which also buttressed the yen and the Swiss franc.
In a week light on data, markets are awaiting the European Central Bank’s decision on interest rates Thursday. Most observers expect the ECB to keep benchmark rates at 1.25%, while simultaneously signaling its intention to raise them within the coming months to stamp out price pressures.
That has helped contain the euro’s losses, even as traders struggle with the impulse to sell the currency on as-yet-unresolved fears about Greece’s financial distress. European and international officials are negotiating a package deal with Greece’s private debt holders that could provide up to 100 billion euros ($146.3 billion) in new lending for the country over the next three years, two euro-zone government officials familiar with the talks told Dow Jones Newswires on Wednesday.
“There is increasing nervousness about the outlook for the euro zone’s debt problems,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. He cited a widening of credit spreads between the benchmark yields of Portugal, Greece and Spain as contributing to euro weakness.
“We do expect the ECB to signal additional policy tightening tomorrow, but the euro will probably have a hard time getting to that 1.50 level” amid unrelenting concern about Greece being forced to restructure its debt, Esiner added.
The euro pulled above its European trading low but was mired around $1.4630 in early U.S. trading, below Tuesday’s New York close near $1.47. A broadly stronger yen, supported by safe-haven flows, pushed the dollar to below Y80, its lowest level in about a month. The yen rose against the euro to Y116.85.
The dollar hovered near break-even against the Swiss franc at 0.8370, while the single currency slipped to CHF1.2229.
The strength of the yen has defied the gravitational pull of Japan’s disaster-hit economy. Investors still purchase the currency in times of global risk aversion, given Japan’s strong current account surplus and an economy not reliant on external capital flows.
But analysts say the market is clearly testing the resolve of Japan’s Ministry of Finance (MoF), which is determined to keep the yen weak to help spur a recovery.
“In light of the fact that dollar/yen is once again testing Y80 while, at the same time, the Nikkei 225 is struggling to stay above 9,400, it therefore seems reasonable to speculate whether the MoF is once again considering launching an intervention campaign,” said Simon Derrick, currency analyst at Bank of New York-Mellon in a research note to clients.
