Posted - 06/14/2010 : 16:54:25
Euro Pares Gains After Moody’s Lowers Greece’s Rating to Junk
June 14, 2010, 4:21 PM EDT
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By Ben Levisohn and Catarina Saraiva
June 14 (Bloomberg) -- The euro pared gains against the dollar after Moody’s Investors Service lowered Greece’s credit rating to non-investment grade, signaling the region’s governments may struggle to narrow their budget deficits.
Europe’s common currency earlier climbed the most versus the greenback in more than two weeks after a report showing the region’s industrial production expanded at a faster pace than forecast prompted traders to unwind bets it would decline. The yen reversed its losses against the dollar as stocks and crude oil pared gains, spurring demand for the currency as a refuge.
“The downgrade of Greece was certainly well anticipated; the timing was not,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., world’s largest custodial bank, with more than $20 trillion in assets under administration. “It continues to draw attention to the still unresolved problems of the EU.”
The euro rose 1 percent to $1.2228 at 4:16 p.m. in New York, from $1.2112. It earlier advanced as much as 1.5 percent, the most on an intraday basis since May 27. It rose 0.8 percent to 111.89 yen, from 111. Japan’s currency gained 0.2 percent to 91.50 per dollar from 91.65 after earlier falling as much as 0.5 percent.
Moody’s said it downgraded Greece’s government bond ratings by four levels to Ba1, below investment grade, from A3. The outlook is stable, the company said. Moody’s cited the country’s economic “risks.”
“The market’s been warned that the bad news from Europe is not out of the way,” said Lane Newman, director of foreign exchange at ING Groep NV in New York. “At the moment, it’s unlikely the fundamental news or sentiment will change for the euro.”
The European Union last month announced a rescue package of almost $1 trillion, with support from the International Monetary Fund, to shore up the finances of the region’s weakest economies.
The Standard & Poor’s 500 Index fell 0.2 percent after earlier gaining as much as 1.3 percent. Crude oil for July delivery rose 1.6 percent on the New York Mercantile Exchange after earlier increasing as much as 3 percent.
“We’re seeing people pull back on their risk trades because the Greece scenario is bringing back the problem that has been of much concern over the past few months,” said Kathy Lien, director of currency research, with online currency trader GFT Forex, in New York.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those betting on a gain was near a record on June 8, according to the Washington-based Commodity Futures Trading Commission.
Futures positions, when they reach an extreme, are sometimes viewed as a contrarian indicator because traders often seek to cut positions when momentum in a currency shifts.
“This is a short covering rally,” said Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. in New York. “There is extreme positioning. This is one time when it’s a crowded trade but it’s the right trade. There’s still nothing to like about the euro.”
The euro extended last week’s advance against the dollar and the yen after a report showed European industrial production expanded 0.8 percent in April, more than economists forecast, after a 1.6 percent increase in March.
The Bank of International Settlements said the euro’s 15 percent slump this year may fuel a resumption of economic growth by making local products cheaper than imported goods. The record budget deficits in countries including Greece had spurred speculation the 16-nation currency union may split.
European Central Bank Governing Council member Ewald Nowotny said the euro’s volatility is “completely unproblematic” and doesn’t require any measures to counter it.
“The volatility can’t be explained with economic reasons. It’s partly due to elements of speculation,” Nowotny said in Vienna today. “However, I don’t want to exaggerate it. We don’t welcome it but we don’t see a reason to act.”
Implied volatility on one-month euro-dollar options touched 13.3550 percent today, the lowest level since May 14, after trading as higher as 18.6150 percent last month, indicating investors see smaller price swings in the coming month.
--Editors: James Holloway, Dave Liedtka
To contact the reporters on this story: Ben Levisohn in New York at firstname.lastname@example.org; Catarina Saraiva in New York at email@example.com.
To contact the editor responsible for this story: David Liedtka at firstname.lastname@example.org
And he that hath lyberte ought to kepe hit wel / For nothyng is better than lyberte / For lyberte shold not be wel sold for alle the gold and syluer of all the world.
-Caxton's edition of Aesop's Fables, 1484