September 24th, 2012

Euro futures – The euro declined to a one-week low against the dollar after a gauge of German business confidence unexpectedly dropped in September, adding to concern the debt crisis is hindering the region’s economy.

The 17-nation currency fell for a fifth day versus the yen after German Chancellor Angela Merkel and French President Francois Hollande clashed during the weekend on a timetable to introduce joint oversight of euro-area banks. The Ifo institute in Munich said its business climate index dropped for a fifth straight month. The Australian dollar weakened on speculation growth in China, its biggest trading partner, is worsening.

“The market is concerned about further weakness from the European core and furthering downgrading in the European outlook,” Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., said in a telephone interview. “There’s also a market correction in the euro after having been overbought in recent weeks.”

The euro dropped 0.4 percent to $1.2931 at 5 p.m. New York time, reaching the lowest level since Sept. 13. The shared currency fell 0.8 percent to 100.67 yen, extending its daily losing streak to the longest since the period ended July 24. The yen rose 0.4 percent to 77.85 per dollar.

Euro Currency – Test Levels

“The broad weight on risk assets and the focus on key hurdles in the ongoing euro-zone saga has seen the single currency make a credible test of the $1.2900 to 1.2910 support zone,” Shaun Osborne, chief currency strategist at Toronto- Dominion Bank, wrote today in a note to clients. “With days ahead of anything potentially positive out of Europe, it is best to stick with the trend. Below $1.29, the low $1.28 area looks to be the next major area of support.”

Implied volatility, which signals the expected pace of currency swings, for the currencies of Group of Seven nations rose to 7.98 percent from 7.75 percent on Sept. 13, its lowest level since October 2007, according to a JPMorgan Chase & Co. index. Lower volatility makes investments in currencies with higher benchmark lending rates more attractive because the risk in such trades is that market moves will erase profit.

The euro may rise against the yen to 104.81, its strongest level since May 4, if it doesn’t fall below a level of so-called support, technical analysts Karen Jones and Axel Rudolph of Commerzbank AG in London wrote in a report today.

Zloty Sinks

The Polish zloty weakened after a report that Zyta Gilowska, a central banker who backed monetary tightening at least twice in 2012, was hospitalized. Gilowska will miss a meeting held on Oct. 2-3 by the country’s 10-member Monetary Policy Council.

The currency depreciated 0.4 percent to 4.1516 against the euro. The zloty fell more than all but two of 20 emerging market currencies tracked by Bloomberg.

The yen strengthened versus most of its major counterparts as stocks slid. The Standard & Poor’s 500 Index fell as much as 0.6 percent. Japan’s currency tends to strengthen during periods of financial turmoil because the country’s current-account surplus means it isn’t reliant on foreign capital.

Japan’s economy has returned to a recovery path, according to minutes of the central bank’s August meeting released today in Tokyo. The Bank of Japan (8301) unexpectedly increased its asset- purchase fund to 55 trillion yen ($710 billion) at its meeting last week.

Kiwi Falls

New Zealand’s dollar declined on speculation that disagreement among the euro region’s leaders is curbing prospects for growth, damping demand for higher-yielding assets. The so-called kiwi fell 0.8 percent to 82.29 U.S. cents, posting its biggest drop since July 23.

Australia’s dollar dropped against the majority of its 16 major peers as China’s Economic Information Daily said downward pressure on the Asian nation’s economy was increasing. Europe’s debt problems are still at a “high risk” phase and the global economic recovery is “bumpy,” the newspaper cited Zhang Ping, head of the National Development and Reform Commission, as saying.

The so-called Aussie fell 0.3 percent to $1.0425, and declined 0.7 percent to 81.16 yen.

From the end of 2008 through July, no major currency rose as much as Australia’s dollar, thanks to booming shipments of iron ore and other commodities to China. Since then, it’s the worst performer as the engine of world growth slows.

Aussie Drop

The Aussie depreciated 1.5 percent in the past month, the second-biggest decline among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. Traders are betting Australia’s central bank will cut interest rates to boost growth, dragging down the currency even though the Standard & Poor’s GSCI Index of commodities has risen almost 20 percent from its low this year in June.

“Although most of today’s decline is being drive by external concerns emanating from Europe, the implications for the global growth outlook are Aussie dollar negative and driving downward movement,” Eric Theoret, a currency strategist in Toronto at Bank of Nova Scotia (BNS)’s Scotia Capital unit, wrote today in a note to clients.

The Ifo institute said its business climate index, based on a survey of 7,000 executives, dropped to 101.4 from 102.3 in August. That’s the lowest reading since February 2010. Economists predicted an increase to 102.5, a Bloomberg News survey showed.

Merkel and Hollande, meeting on Sept. 22 to mark Franco- German reconciliation after World War II, failed to mask their differences on a planned banking union meant to contain the debt crisis. “The earlier, the better,” Hollande told reporters in the German town of Asperg. Merkel said there’s no point doing something fast if it then doesn’t work.

- Joseph Ciolli in New York at Bloomberg.