Euro Dips As European Debt Woes Start To Catch Up
By Javier E. David
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The euro fell from a new four-month high against the dollar Monday, as the gravitational pull of Europe's debt crisis temporarily outweighed the lure of higher euro-zone interest rates that had supported the single currency.
Investors have recently favored currencies that offer higher yields, broadly underpinning the euro and pound while undercutting the low-yielding dollar. Meanwhile, ongoing instability in the Middle East has spurred nervous traders to buy Swiss francs and yen as a safe harbor.
Even as a sovereign debt crisis continues to fester in the 17 nations that use the euro, the single currency has emerged relatively unscathed. Yield-chasing traders were galvanized by the European Central Bank president Jean-Claude Trichet's warning last week that interest rates could be hiked as early as next month.
But Monday, ratings agency Moody's Investors Service downgraded Greek debt, sending the country's credit default swaps--derivatives that function like a default insurance contract for debt--flying out to record levels. That news converged with yields on Portugal's 10-year government bonds hitting a euro-era high of 7.5%.
Markets have long fretted that Greece, Portugal and Ireland--three of the euro zone's weakest economies--were in danger of either defaulting on their debt or restructuring it.
"The euro has gained based on what Trichet said, but the market is realizing its come quite a way" in a short period of time, said John McCarthy, manager of currency trading at ING Capital Markets in New York. "I think staying above $1.40 will prove a little more elusive than people think."
Indeed, the euro backed further away from its highest levels since early November at $1.4036, falling to U.S. session lows near $1.3977. A broadly stronger yen benefited from risk-averse investors seeking a safe haven, pulling the dollar down to Y82.11. The euro was also weaker on the day versus the yen, at around Y114.75.
Although the dollar has traditionally benefited from investment flows during times of geopolitical instability, a possible global oil shock--triggered by festering civil unrest in Libya--has made investors shun the currency during bouts of risk aversion. During past oil crises, the dollar has fallen, as a spike in oil--which hit 2-1/2 year highs on Monday above $105--stirs broad-based inflation.
"There's still this incredible uncertainty surrounding this Libya situation," said Greg Salvaggio, vice president of capital markets at Tempus Consulting in Washington.
"The longer it drags out, the more uncertainty exists, and that drags on the dollar," he said, adding that the euro was likely to remain underpinned by the prospect of higher euro-zone interest rates, which could be raised as soon as next month.
The beleaguered U.S. currency is also being hampered by the Federal Reserve's loose monetary policies. When juxtaposed against the European Central Bank's strong stance against inflation, the dollar has ended up losing out as investors gravitate toward the higher yield potential of the euro. Many are concerned that the Fed may end up behind the curve should price pressures move from simmer to boil.
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