Euro falls on concerns over Greece

 

HAVING RISEN for two straight days after last week’s joint European Union-International Monetary Fund agreement on aid for Greece, the euro ran out of steam yesterday, falling sharply against the dollar as investors took profits and amid unease about the euro zone’s fiscal health.

The currency briefly hit a two-month high against the yen and pushed above $1.35 overnight but retreated on profit-taking and as worries resurfaced about Greece.

Although Greece sold €5 billion of seven-year debt on Monday, spreads between Greek bonds and benchmark German bunds widened yesterday, suggesting investors remain worried.

Greek plans to reopen a 20-year bond issue added to worries about its funding needs, while news that Ireland would take a bigger stake than planned in the banking sector raised concerns, limiting euro gains.

“Last week’s deal means it’s unlikely you’ll see a Greek default, but that doesn’t mean we won’t have concerns about the ability of Greece or other peripheral euro-zone countries to fund their deficits,” said Michael Malpede, analyst at Easy Forex in Chicago. “That is going to hurt the euro.”

The euro fell 0.6 per cent to $1.3416 and shed 0.5 per cent to ¥124.48. Earlier, it hit ¥125.44, its highest level since early February.

Greek seven-year notes fell in the first day of trading and an auction of 12-year bonds garnered demand for less than half the debt offered on concern Europe’s most indebted nation will keep struggling to fund itself.

The drop drove yields on the €5 billion of seven-year notes to 6.27 per cent towards the end of London trading, up from 6 per cent when issued. The yield premium to comparable German debt widened about 30 basis points to 363 basis points.

Ten-year bonds also fell, while the cost to insure Greek debt using credit-default swaps rose. Greece’s unexpected sale of 12-year bonds yesterday raised €390 million, less than the sale’s €1 billion upper limit.

Prime minister George Papandreou’s government must raise as much as €10.5 billion by the end of May to avoid rekindling the budget crisis that prompted the European Union to step in last week with a rescue plan that backstopped Greece’s finances.

“The unfortunate reality is that people do not have a great deal of confidence that Greek yield spreads will compress from here,” said Charles Diebel, a senior fixed-income strategist at Nomura International in London.

“Someone advised Greece that it would be a good idea to tap the bond and raise some money and alleviate some market pressure,” he said in reference to yesterday’s auction. “The pick-up was probably less than they were hoping for.”

Greece received orders for €6 billion of the seven-year notes, 20 per cent more than the amount sold. That suggests demand has waned when compared with a sale of 10-year notes earlier this month. – (Reuters/Bloomberg)