Euro Weakens as Moody’s Cuts Portugal’s Credit Rating; Yen Recoups Losses

By Keith Jenkins and Yoshiaki Nohara
Mar 16, 2011 4:35 AM MT
BLOOMBERG

The euro halted three days of gains versus the dollar after Moody’s Investors Service downgraded Portugal’s credit rating, reviving concern about Europe’s ability to solve its debt crisis.

The 17-nation common currency depreciated versus all but two its major counterparts after Portugal was cut two steps by Moody’s yesterday to A3, four steps from so-called junk status. Japan’s yen rebounded as Tokyo Electric Power Co. said a containment vessel may have been breached at a crippled nuclear plant. Norway’s krone weakened before the nation’s central bank announces its decision on interest rates.

“The euro’s under pressure after Portugal’s downgrade,” said Jane Foley, a senior strategist at Rabobank International in London. “Momentum for euro buying has waned.”

The euro declined 0.4 percent to $1.3937 as of 6:58 a.m. in New York. It rose to $1.4013 yesterday, the strongest since March 7. The currency weakened 0.4 percent versus the yen, trading at 112.55.

Technical analysis suggests the euro’s outlook has worsened after its failure to sustain gains past $1.40, Foley said.

Portugal “faces significant challenges, not least a less supportive economic environment,” Moody’s said late yesterday. The rating company said its outlook remained negative given Portugal’s “subdued growth prospects” and risks that the government won’t be able to implement deficit-reduction plans.

Finance Ministers

Finance ministers from the euro countries failed on March 14 to decide how to bring an emergency aid fund up to its full 440 billion euros ($615 billion) from its current level around 250 billion euros. Luxembourg’s Jean-Claude Juncker said a “few points of detail” might not be settled by the March 24-25 summit, and called another gathering of ministers for March 21.

The yen weakened earlier as the nation’s central bank pumped an additional 5 trillion yen ($62 billion) into the financial system, boosting Asian stock markets. The Nikkei 225 (NKY) Index rose for the first day in five.

The Japanese currency was little changed against the dollar at 80.73, having depreciated as much as 0.6 percent to 81.17.

The MSCI Asia Pacific Index of stocks rose 3.1 percent today, led by a 5.7 percent rally in the Nikkei 225. The Japanese benchmark plunged 11 percent yesterday.

The U.S. currency gained against nine of its 16 most-traded peers as officials battling to prevent a nuclear meltdown said fuel rods at two reactors at the power station north of Tokyo may have been damaged.

Japan’s yen has surged since last week’s magnitude 9 earthquake and tsunami amid speculation local investors are selling overseas assets to repatriate funds for reconstruction.

Dollar Index

About 70 percent of the uranium-plutonium fuel rods at the Fukushima Dai-Ichi power station’s No. 1 reactor and a third of the No. 2 reactor’s fuel may have been impaired, Tokyo Electric Power said. The plant’s cooling systems were knocked out in the wake of the earthquake.

One-month implied volatility for the dollar-yen rate fell to 13 from 14.08 yesterday, the highest since May 26. The volatility has risen 58 percent since the temblor. Implied volatility is a measure of expected price swings and the key gauge for option prices.

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, advanced for the first day in four, gaining 0.3 percent to 76.555.

Prices paid to producers in the U.S. probably increased in February on higher costs for energy and food, a report today is forecast to show. The Labor Department’s producer price index likely rose 0.7 percent after a 0.8 percent gain in January, according to a Bloomberg News survey of economists.

‘Firmer Footing’

“I hate to say it in an emergency like this, but people know the U.S. economy is holding firm and find it easy to buy the dollar as a safe haven,” said Masahide Tanaka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest bank. “The nuclear problem is the biggest risk right now. The yen will remain volatile until we see a clear picture of the situation.”

Federal Reserve policy makers said yesterday that the U.S. recovery “is on a firmer footing,” while higher energy prices are likely to have a temporary effect on inflation.

The dollar is likely to strengthen against the yen, “particularly with the Bank of Japan standing ready” and injecting liquidity, said Michael McCarthy, chief market strategist at CMC Markets in Sydney.

The BOJ has added 28 trillion yen to the financial system since March 14 after Governor Masaaki Shirakawa pledged to keep pumping cash into the economy to stabilize markets.

“The BOJ will have no choice but to add to monetary easing, which may ease the yen’s appreciation,” said Tomokazu Matsufuji, a dealer in Tokyo at SBI Liquidity Market Co., a unit of SBI Holdings Inc. “Policy makers may intervene verbally if the yen strengthens rapidly beyond around 80.60 per dollar.”

The Norwegian krone weakened 0.3 percent to 5.6779 against the dollar before the central bank’s interest-rate decision. The Oslo-based Norges Bank will leave its key rate at 2 percent today, 17 of the 18 economists surveyed by Bloomberg say. One economist expects policy makers to raise the rate to 2.25 percent. The bank announces its decision at 2 p.m. local time.

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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