Euro Posts Biggest Monthly Decline in Year on Greece’s Turmoil

The euro recorded its biggest monthly drop in a year against the yen and fell versus the dollar as concern Greece won’t be able to meet its debt obligations spurred a retreat from riskier assets.

The 16-nation currency declined in January as the cost of insuring Greece’s debt reached a record. The dollar rallied against the euro before next week’s U.S. payrolls report as Kansas City Federal Reserve President Thomas Hoenig dissented on how long the target lending should be held at virtually zero. A report showed the nation’s economy grew in the fourth quarter at the fastest pace since 2003.

“Greece will erode confidence in the euro’s viability for a while,” said Jessica Hoversen, a foreign-exchange and fixed- income analyst at the futures broker MF Global Ltd. in Chicago. “On top of being a safe haven, there are fundamental reasons that underpinned the dollar. The economic situation in the U.S. looked better.”

The euro fell 6.1 percent to 125.13 yen yesterday, from 133.20 on Dec. 31, in its biggest monthly drop since depreciating 9.1 percent in January 2009. It touched 124.82 yesterday, the lowest level since April 28. The euro dropped 3.2 percent to $1.3863, from $1.4321, and reached $1.3862, the lowest level since July 9. The yen appreciated 3.1 percent to 90.27 versus the dollar, from 93.02.

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Greece’s Debt

Credit-default swaps insuring Greece’s debt reached a record high of 422.5 basis points on Jan. 28, CMA DataVision prices show. Swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is equal to $1,000 a year on a contract protecting $10 million of debt.

Germany and France denied a report on Jan. 28 in the newspaper Le Monde that EU members are examining ways to provide assistance. Greece’s Prime Minister George Papandreou said in an interview yesterday that he has no knowledge of any European Union bailout talks and promised deeper budget cuts if needed.

The European Commission expects to give an assessment of Greece’s budget plan on Feb. 3, the commission said in a statement on its Web site yesterday. Portugal needs deeper deficit cuts than included in its 2010 budget to avoid a credit downgrade, Moody’s Investors Service said on Jan. 28.

“If fears of contagion become widespread, risk-averse investors could start to gun for even the larger or stronger euro-zone economies and their debt,” Geoffrey Yu, a currency strategist in London at UBS AG, wrote in a note to clients.

Franc Pares Gain

The franc pared its monthly gain versus the euro to 0.8 percent yesterday on speculation Switzerland’s central bank intervened in currency markets to curb its strength and support the nation’s economy.

The Swiss currency traded at 1.4705 versus the euro yesterday, compared with 1.4836 on Dec. 31. It touched 1.4636, the strongest level since March 10, two days before the central bank intervened last year.

Swiss National Bank President Philipp Hildebrand, in Davos, Switzerland, for the annual meeting of the World Economic Forum, declined to comment yesterday. Central banks intervene by buying or selling currencies to influence exchange rates.

The dollar strengthened as the Commerce Department reported yesterday that gross domestic product increased at a 5.7 percent annual pace from October through December, the fastest in six years. The median forecast of 84 economists in a Bloomberg News survey was for a 4.7 percent advance.

‘Good News’

“Any time the numbers beat expectations that significantly, it’s good news,” said John Norris, senior market strategist at Brewer Investment Group in Chicago. “The dollar was strong already, and it’s continued the trend.”

The Fed reiterated on Jan. 27 at the conclusion of its two- day policy meeting its intention to cease buying mortgage-backed securities in March and repeated that interest rates will stay low for an “extended period.”

Hoenig dissented, saying “financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.”

U.S. employers added 13,000 jobs this month after unexpectedly eliminating 85,000 positions in December, according to the median estimate of 62 economists in a Bloomberg News survey. The Labor Department’s payrolls report is due Feb. 5.

Sterling fell 1.1 percent to $1.5986 this month before the Bank of England’s meeting on Feb. 4. Policy makers will hold the target lending rate at a record low 0.5 percent, according to all 61 economists in a Bloomberg survey.

The yen rose this month against all of its 16 most-traded counterparts tracked by Bloomberg, fanning concern its strength will dent exports for companies such as Toyota Motor Corp.

Bank of Japan Governor Masaaki Shirakawa said at a business conference in Tokyo yesterday that Japan’s policy makers are “prepared to act swiftly and decisively should concerns that financial market stability might be hampered re-emerge.”

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