Euro rises on hopes discussions on Greek aid package will conclude soon

EXCHANGE RATES:THE EURO rose from near a one-year low against the dollar yesterday as Greece's prime minister George Papandreou tried to persuade labour unions to accept austerity measures and European economic reports showed signs of strength.

The euro advanced versus the yen as the EU’s monetary affairs commissioner Olli Rehn said he was confident discussions on the aid package for Greece would conclude soon.

“The euro may be putting in a short-term bottom,” said Alan Kabbani, a senior currency trader at Wells Fargo.

“Germany is not giving up on Greece. While a package is not going to solve its problems, it will give them a lifeline.”

The euro traded at $1.3247 at lunchtime in New York, compared with $1.3221 on Wednesday, when it dropped to $1.3115, the lowest level since April last year.

The euro advanced 0.3 per cent to 124.65 yen from 124.32.

Earlier, Bank of New York Mellon said investors were abandoning the euro at a rate not seen since the collapse of Lehman Brothers as Europe’s worsening fiscal crisis threatened to splinter the 16-nation currency union.

Pension funds and banks sold euros in April at the fastest pace since the second half of 2008, when the currency tumbled more than 25 per cent against the dollar between mid-July and the end of October, according to BNY Mellon, the world’s biggest custodian of financial assets with $23 trillion.

“The assumptions that went into the make-up of the euro zone, and hence the euro, are now being brought into question and revalued,” said Eric Busay, a manager of currencies and international bonds in Sacramento at the California Public Employees’ Retirement System, the largest US public pension, with $202 billion under management.

“There are differences, and screaming differences, that have now been shown between the regions of the euro zone.”

While the euro became a rival to the dollar after the common currency’s inception in 1999, the debt crisis that began in Greece shows how it is being shaken by one country comprising 2.6 per cent of the region’s economy.

The euro’s 11 per cent decline in the past six months made it the worst performer among its 16 most-traded peers.

Standard & Poor’s cut the credit ratings on Greece, Portugal and Spain this week.

Credit-default swaps on the debt of Greece, Portugal and Spain climbed to record highs as the 16 nations making up the euro failed to bridge economic and political differences fast enough for traders.

Currency strategists are having a hard time keeping up with the decline. The median average of 32 forecasts compiled by Bloomberg is for the currency to end the year at $1.32.

In February the estimate was $1.43.

BNY Mellon’s chief currency strategist Simon Derrick said the euro may tumble to $1.10 by the end of 2011.

Morgan Stanley predicts it will trade at $1.24 by year- end.

Investors are on course to sell a net €50 billion of euro-region bonds this year, compared with purchases of €225 billion in 2009, according to a Nomura Holdings projection.

Central banks cut the share of euros in their $8.1 trillion of reserves to 27.6 per cent in the fourth quarter of 2009 from 28 per cent in the previous three months, according to Morgan Stanley calculations based on IMF data. The figure was 17 per cent when the euro was introduced 11 years ago. – (Bloomberg)