The euro fell against the dollar and yen after Moody’s Investors Service downgraded Portugal’s credit rating, stoking concern about the region’s fiscal health.
The dollar and the yen rose against most of their peers as China’s clampdown on speculative property investment and steel production stoked demand for the currencies as a haven, and sent Australia’s dollar lower. Portugal was cut two notches to A1 at Moody’s, which cited a growing debt burden and weak economic growth prospects. The euro stayed lower as a report showed German investor confidence declining for a third month in July.
“The downgrade reminds investors that there’s still problems in Europe,” said Adam Cole, head of global currency strategy at Royal Bank of Canada Europe Ltd. “While this isn’t a huge surprise for the market, it will help the euro lower.”
The euro fell 0.4 percent to $1.2544 at 10:15 a.m. in London, a third straight decline against the dollar. The 16- nation currency dropped 0.7 percent to 110.82 yen, while the yen strengthened 0.2 percent to 88.44 per dollar.
The Mannheim-based ZEW Center for European Economic Research today said its index of investor and analyst expectations, which aims to predict developments six months ahead, fell to a 15-month low of 21.2 from 28.7 in June. Economists had forecast a drop to 25.3, according to the median of 34 forecasts in a Bloomberg News survey.
Chinese Tightening
The Australian dollar fell from the strongest level since June on concern China’s attempts to tighten policy would curb demand for commodities.
The Shanghai Composite Index lost 1.6 percent and the MSCI Asia Pacific Index of regional shares slid 0.5 percent. BHP Billiton, the world’s largest mining company, sank as much as 2.8 percent. Chinese property developers fell as the nation’s banking regulator said it hasn’t changed policies on home loans, and called on lenders to strictly enforce existing rules.
Li Yizhong, head of the Ministry of Industry and Information Technology, said China will push for mergers in the steel industry and curb any rapid increase in steel production, according to a speech posted on the ministry’s website today.
Australia’s currency dropped 0.6 percent to 87.07 U.S. after touching 87.93 cents yesterday, the most since June 22.
“Markets seem to be looking for an adjustment in Chinese growth and we’re seeing a bit of profit-taking in the Aussie leading into those announcements,” said Jim Vrondas, a manager at the online foreign-exchange dealer OzForex Ltd. in Sydney. “The Aussie is running out of momentum and if we get a clear break below 86.80 cents, I think we can see more downside throughout this week.”
‘Vulnerabilities’
The euro also fell amid concern tests to demonstrate the resilience of the region’s banking system will fail to reassure investors. European officials called on banks to try to raise money themselves before seeking state support if stress tests by regulators reveal “vulnerabilities.”
“It is firstly up to the banks themselves,” Dutch Finance Minister Jan Kees de Jager said in Brussels yesterday after a meeting with euro-area counterparts. “They will get a certain period to refinance themselves in the market, but the countries will immediately announce that there is a certain backstop.”
Banks that fail stress tests will, “in the worst case,” need government aid to strengthen their balance sheets, German Finance Minister Wolfgang Schaeuble said today.
“The goal is to make it clear that European banks are stable and wherever there are problems, there have to be consequences,” Schaeuble said on Deutschlandradio. The tests “won’t create disturbances, but rather clarity,” he said.
Stress Tests
European Union regulators are examining the strength of 91 banks to determine whether they can survive potential losses on sovereign-bond holdings. EU finance ministers will gather in Brussels today to discuss the procedure of stress tests and the disclosure of its findings.
“There are concerns that stress tests will prove to be insufficient to dispel underlying concerns about the depth of the sovereign problem in the region,” said Shuzo Kakuta, a senior foreign-exchange adviser at Tokyo Tomin Bank Ltd. “The euro will remain under pressure.”
Spain, Portugal and Ireland face a 20 percent risk of having to restructure their public debt, while the likelihood is 40 percent for Greece and 10 percent for Italy, said Robert Mundell, a Columbia University professor who won the Nobel Prize in 1999 for research that helped lay the foundation for Europe’s single currency. He spoke in an interview with Bloomberg Television in Siena, Italy, on July 11.
U.S. Earnings
The yen had fallen earlier as earnings from Alcoa Inc., the largest U.S. aluminum producer, stoked optimism about corporate profits in the world’s biggest economy.
“There is emerging optimism that the ongoing quarterly reporting will underscore continued profit growth at U.S. companies,” said Hiroshi Higa, senior strategist in Tokyo at MoneySquare Japan Inc., an online currency trading company. “Such a view will ease risk aversion and put some downward pressure on the yen.”
Alcoa said second-quarter earnings from continuing operations were 13 cents a share, exceeding the 11-cent average estimate of 17 analysts surveyed by Bloomberg. The stock rallied more than 3 percent in extended trading.
Profits for S&P 500 companies are projected to have increased 34 percent in the April-June period, and by the same amount in 2010, according to analysts’ estimates compiled by Bloomberg. A total of 23 companies in the S&P 500, including Google Inc. and Citigroup Inc., will report earnings this week.
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