Crisis Spreads Through Europe

Euro Heads for Weekly Decline as Crisis Spreads Through Europe 

By Stanley White and Ron Harui

The euro headed for its biggest weekly decline against the yen since the common European currency's debut in 1999 on speculation the global credit crisis is spreading through the region.

The euro was also set for a weekly loss against the dollar after Belarus, Ukraine, Hungary and Iceland joined Pakistan in requesting at least $20 billion of emergency loans from the International Monetary Fund. Standard & Poor's Ratings Services yesterday threatened to cut Russia's debt ratings.

``There are concerns over country risk in Europe,'' said Toshihiko Sakai, head of trading in foreign exchange and financial products in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's biggest bank. ``Some currencies there appear to be under speculative attack because their banking sectors aren't sufficiently guaranteed by the governments.''

The euro fell to 122.78 yen at 12:10 p.m. in Tokyo from 125.89 late yesterday in New York. It touched 122.60, the weakest level since December 2002. It slid 9.9 percent this week. The euro declined to $1.2769 from $1.2934 yesterday, when it reached $1.2728, the lowest level since November 2006. The dollar bought 96.13 yen from 97.31. The euro may weaken to parity with the dollar by year-end, Sakai said.

The pound fell to $1.6042 from $1.6230 for a 7.2 percent drop this week on speculation the Bank of England will lower interest rates to help avert a prolonged recession. Sterling touched $1.6038, the weakest since September 2003. It slid as much as 3.4 percent on Oct. 22, the biggest intraday loss since September 1992, when investor George Soros helped drive the currency out of Europe's system of linked exchange rates.

U.K. Economy

U.K. gross domestic product rose 0.5 percent from a year earlier in the third quarter, slowing from a 1.5 percent pace of growth in the previous three months, according to a Bloomberg survey of economists. The Office for National Statistics will release the data at 9:30 a.m. today in London

The spread, or difference in yield, between two- and 10- year gilts was at 122 basis points, near the widest since October 1996, a sign traders expect the BOE to lower its 4.5 percent benchmark rates by year-end.

The euro and the pound may weaken as European and U.K. banks have five times as much loan exposure to emerging markets as the U.S. or Japan, with most lending to Eastern Europe, according to Morgan Stanley.

Emerging Markets

``Part of the reason why euro-dollar continues to drift lower has to do with the rising risks that pressures in Eastern Europe will have a negative boomerang effect on Euroland,'' London-based currency strategists Stephen Jen and Spyros Andreopoulos wrote in a research note yesterday.

European banks' lending to emerging markets is about 21 percent of Europe's gross domestic product and U.K. banks' loans are around 24 percent of the nation's GDP, compared with 4 percent for the U.S. and 5 percent for Japan, the strategists wrote, citing data from the Bank for International Settlements.

The dollar also advanced before data that may show a revival in existing home sales as U.S. lawmakers press for measures to curb mortgage foreclosures.

U.S. existing home sales rose 0.8 percent in September after a 2.2 percent decline the previous month, figures may show today, according to a separate survey. Federal Deposit Insurance Corp. Chairman Sheila Bair urged Congress yesterday to use loan guarantees to make it easier for homeowners to pay their mortgages.

``U.S. homeowners are hurting, and policy makers have been somewhat late in addressing this issue,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``Moves to help stem foreclosures are a positive for dollar sentiment.''

European Recession

The euro has fallen about 20 percent versus the dollar since touching the all-time high of $1.6038 on July 15. The European economy may be headed for a recession that could last two to three years, Finland's Finance Minister Jyrki Katainen said on Oct. 22 in an interview on Bloomberg Television.

Net selling of European stocks among institutional investors has been three times higher than average over the past year, and foreign investors account for most of the sales, according to Samarjit Shankar, director of strategy for the global markets group in Boston at Bank of New York Mellon, the world's largest custodial bank with more than $23 trillion in assets under administration.

``One thing that stands out this week is huge European equity market outflows,'' said Shankar. ``Net selling is adding to pressure on the euro. Growth in the euro zone is deteriorating very fast.''

Yen Gains

The yen rose versus all 16 major currencies this week as a global stocks rout wiped out more than $10 trillion of market value this month, prompting investors to sell higher-yielding assets funded in the Japanese currency.

The MSCI Asia Pacific Index fell 3.3 percent for a third day of declines after Sony Corp. slashed its earnings forecast and South Korea's economic growth weakened. The Standard & Poor's 500 Index has dropped 3.5 percent so far this week.

``Holding stocks is a risk many people want to avoid,'' said Kengo Suzuki, currency strategist at Shinko Securities Co. in Tokyo. ``As long as investors trade off of sentiment and ignore fundamentals, this will support the yen.''

The euro may fall to 120 yen in coming weeks, he said.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency market moves erase those profits. Japan's benchmark rate of 0.5 percent is the lowest among major economies.