The euro had its biggest loss against the dollar in more than a year on speculation the European Central Bank will cut interest rates amid record Greek bond yields and the region’s deepening debt crisis.
The franc posted the largest weekly decline against the euro since the shared currency was introduced in 1999 after the Swiss National Bank imposed a 1.20 ceiling on the currency. The Dollar Index rallied to its strongest weekly result in 13 months as investors sought safety, pushing yields on the 10-year note to a record low before the Federal Reserve holds a policy meeting Sept. 20 and 21.
“The momentum on the weaker euro trend is set to accelerate,” said Ken Dickson, investment director of currencies at Standard Life Investments in Edinburgh, with more than $250 billion under management. “The solutions coming out of Europe are not working and not helping the periphery or the bond markets to stabilize.”
The euro fell 3.9 percent to $1.3656, from $1.4205 on Sept. 2, the biggest weekly drop since July 12, 2010. The shared currency fell 2.9 percent versus the yen to 105.99 from 109.11.
Dickson said he expects the euro to fall to $1.34 during the next few weeks with potential to slump to $1.30 by the end of the year.
The dollar rose for the third week against the Japanese currency, strengthening 1.1 percent to 77.61, from 76.80.
The franc had the biggest intraday loss ever against the euro on Sept. 6, falling as much as 8.7 percent after the nation’s central bank said it would defend the 1.20 ceiling with the “utmost determination.”
The Swiss currency is still the best performer this year among a basket of the currencies of 10 developed markets, appreciating 3.1 percent, according to Bloomberg Correlation- Weighted Currency Indexes. The dollar was the worst performing currency, losing 3.2 percent.
“In circumstances of a continued crisis in the euro zone, we believe that the SNB may be required to purchase foreign currency of between $500 billion and $1 trillion,” Derek Halpenny, European head of currency research at Bank of Tokyo- Misubishi UFJ Ltd. in London, wrote to clients.
Andrew Busch, a global currency strategist at Bank of Montreal in Chicago, estimated the central bank may absorb 200 billion euros ($273 billion) in two months to defend the peg, during a conference call to clients.
The dollar rose against all 16 of its most-traded counterparts after President Barack Obama detailed his $447 billion plan to boost hiring in a Sept. 8 address to Congress. The U.S. economy slowed to 1 percent annual growth rate in the second quarter and the unemployment remains at 9.1 percent in August.
The Dollar Index, which tracks the greenback versus the currencies of six U.S. trading partners, rose 3.3 percent to 77.199 from 74.756, the biggest weekly gain since October 2008.
The yen strengthened against most of its major peers as Group of Seven finance ministers and central bankers met today and yesterday in Marseille, France.
“We’re very concerned about excessive yen gains and I want to clearly state that we are watching speculative movements with great interest”, Japan’s Finance Minister Jun Azumi told reporters in Tokyo Sept. 6.
The Bank of Japan kept monetary policy unchanged Sept.7 and said it would gauge the effects of adding 10 trillion yen ($130 billion) stimulus last month on the yen near a postwar high.
Norway’s krone reached an eight-year high against the euro and the Swedish krona advanced as investors sought alternatives to the franc.
“In light of the move of the SNB to intervene against Swiss, the number of available safe havens has diminished, and that is a negative for the euro against other currencies,” said Aroop Chatterjee, a currency strategist in New York at Barclays Plc in New York. “Investors will be looking to sell the euro against the dollar and the more stable European currencies such as the Norwegian krone and Swedish krona.”
Riksbank only “slightly” cut its guidance for future increases in interest rates on Sept. 7 while signaling it may raise the benchmark next quarter.
The krone rose 1.2 percent to 7.5743 per euro, from 7.6676. It touched 7.4887 on Sept. 7, the strongest since May 2003. Sweden’s krona jumped 1.6 percent to 8.9316 against the euro from 9.0736.
The euro had its biggest intraday loss in a month against the dollar on Sept. 8, tumbling 1.6 percent, after European Central Bank President Jean-Claude Trichet said “downside risks” to the region’s economy have intensified.
The ECB left its benchmark rate at 1.5 percent and cut its 2011 and 2012 growth forecasts at the Sept. 8 policy meeting in Frankfurt. The implied yield on Euribor futures for June slid four basis points to 0.98 percent on Sept. 9, showing traders were adding to wagers for lower borrowing costs.
“The direction of euro-zone risks on the cyclical and financial stability fronts mean it is only a matter of time before the ECB is forced to ease policy, which is likely to happen via an expanded balance sheet and a lower deposit rate over the coming months,” said Lena Komileva, global head of G- 10 strategy in London at Brown Brothers Harriman & Co.
Axel Merk, president and chief investment officer at Merk Investments LLC, said his firm sold $90 million of euros yesterday after European Central Bank President Jean-Claude Trichet took a “more dovish tone.” Merk Investments manages more than $700 million in assets and runs the Merk Hard Currency Fund. Merk disclosed the sale in a note Sept. 9.
The euro traded at less than its 200-day moving average on Sept. 8, falling below $1.37 for the first time since Feb. 23 yesterday, as credit-default swaps showing a more than 90 percent probability that Greece won’t meet its debt commitments.
Two-year German yields fell to a record 0.385 percent and Greek debt yields reached record highs yesterday.
Greece is relying on a sixth payment of 8 billion euros in international bailout loans that had been scheduled to be paid this month. European Union Economic and Monetary Affairs Commissioner Olli Rehn said Sept. 7 he expects a decision by the EU and the IMF on the next quarterly tranche in coming weeks and “trusts” Greece will meet the necessary budget austerity conditions.
“Whenever there are things like ‘Greece is not doing enough’ is said, that is when people get the most scared because of a possibility they may not get the next tranche of aid,” said Brian Kim, a currency strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc. “Periphery concern has continued to be the overarching theme.”
Futures traders increased their bets that the euro will decline against the U.S. dollar, figures from the Washington- based Commodity Futures Trading Commission show.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain — so-called net shorts — was 36,443 on Sept. 6, compared with net shorts of 384 a week earlier.