Euro Falls to Year Low Versus Yen on Greek Downgrade Worries

By Anchalee Worrachate and Yoshiaki Nohara / Feb. 25 (Bloomberg)

The yen climbed to a one-year high against the euro as investors sought the safest currencies amid concern Greece’s credit rating will be lowered as Prime Minister George Papandreou struggles to push through budget cuts.

The yen advanced against all 16 major counterparts after Standard & Poor’s and Moody’s Investors Service said Greece faces further downgrades as early as next month as it copes with the EU’s biggest budget deficit. The euro slid against the dollar after unions took to the streets of Athens and police fired tear-gas and clashed with demonstrators.

“The demand for yen is driven by concern over the rising risks of defaults in Europe,” said Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishi UFJ Ltd. “Greece is in the focus.”

The yen appreciated to 120.49 yen per euro as of 9:30 a.m. in London from 122.03 yen in New York yesterday. It touched 120.24 yen, the highest since Feb. 24, 2009. It strengthened to 89.39 per dollar from 90.15 yen. The dollar climbed to $1.5319 per British pound from $1.5284.

The 16-nation euro declined to $1.3481 from $1.3538. It touched $1.3444 on Feb. 19, the lowest since May 18. The European currency has fallen 2.8 percent versus the dollar in February, heading for a third monthly loss, its longest stretch since November 2008.

Euro Carry Trades

The euro will become a favorite funding currency for carry trades as Greece’s crisis weighs on regional interest rates, Deutsche Bank AG said. The three-month London interbank offered rate, or Libor, for euro loans sank below 0.6 percent for the first time last week, down from more than 5 percent after the collapse of Lehman Brothers Holdings Inc. in September 2008.

“Greece’s crisis has highlighted political and structural weakness in the euro zone,” said Koji Fukaya, a senior currency strategist for Deutsche Bank in Tokyo. “First, it remains unclear whether any aid will be available. And even if any rescue plan comes out, it will take time to see if it’d work.”

The currency may slump further to $1.25, Fukaya said, a level last seen in March 2009.

In carry trades, investors get funds in a country with relatively low borrowing costs and invest in another with higher interest rates, increasing sales of the borrowed currency.

Rating Downgrade

The cost of protecting against default on Greek government bonds increased 10 basis points to 392, the highest in more than two weeks, according to CMA DataVision prices.

“We believe that a further downgrade of Greece of one to two notches is possible within a month,” S&P analysts led by Marko Mrsnik in London said in a statement released late yesterday.

Pierre Cailleteau, managing director of sovereign risk at Moody’s, said in Tokyo today Greece faces a downgrade of “a couple of notches” within a few months if it can’t meet the objectives of its deficit reduction plan.

S&P, Moody’s and Fitch Ratings downgraded Greece’s credit rating in December as its deficit approached 13 percent of gross domestic product. Germany has denied that there are concrete plans to aid Greece, and former European Central Bank Chief Economist Otmar Issing said yesterday granting assistance would “open the flood gates” for other euro-area nations with soaring deficits.

“I’m not sure if other nations have enough resources to help Greece,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “If the issue is neglected, that will stoke concerns about the euro. The dollar remains strong against the euro on a relative basis.”

Exporter Purchases

The Dollar Index, which is used to track the currency against those of six major U.S. trading partners such as the euro and the yen, advanced 0.2 percent to 80.973. It touched 81.342 on Feb. 19, the strongest since June 15.

The yen strengthened on prospects Japanese companies repatriated overseas earnings before the end of the month.

“There’s talk of exporters buying the yen, possibly due to month-end demand,” said Takashi Kudo, general manager of market information service in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp.

Japanese companies said they remain profitable as long as the yen trades at 92.90 per dollar or weaker, according to a Cabinet Office survey released on Feb. 19. That’s stronger than the 97.33 breakeven point they provided last year. A rising yen makes the nation’s exports less competitive abroad.

Large manufacturers expect the yen to average 91.16 per dollar in the six months to March 2010, according to the Bank of Japan’s quarterly Tankan survey.