Euro analysis by Susan Taylor

The euro weakened for a second day, reaching an 11-year low versus the yen, after Standard & Poor’s stripped France of its top credit ratingand cut eight other euro-zone nations.

Susan Taylor
Currencies markets

The shared currency extended a six-week-long slide against the greenback before a series of debt auctions this week by European nations begins with France’s bill sale today. Greece may resume talks with creditor banks after failing to agree on terms of a debt-swap deal last week. The yen and dollar strengthened against most major peers as concern that Europe’s financial turmoil will intensify boosted demand for safety.

“Those downgrades provided another excuse for the speculative community to add to their short positions in euro,” said Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington. “We’ve got a few more European debt auctions out there as market sentimentcontinues to be tested.” A short position is a bet that an asset will decline in value.

The euro fell 0.3 percent to $1.2643 as of 8:18 a.m. in Tokyo from the close in New York on Jan. 13 when it touched $1.2624, the least since Aug. 25, 2010. The shared currency depreciated 0.4 percent to 97.23 yen after dropping to 97.17, the lowest since December 2000. The dollar was little changed at 76.91 yen.

U.S. markets are closed for a public holiday today.

France will auction as much as 8.7 billion euros ($11 billion) in bills today, followed by the European Financial Stability Facility’s 1.5 billion-euro sale of bills the next day. Spain will offer debt tomorrow and Jan. 19, while Portugal will sell bills on Jan. 18.

‘Nervous’ Markets

“Markets are going to remain pretty nervous” until we see the results of European bond auctions this week, said Michael Turner, a fixed-income strategist in Sydney at Royal Bank of Canada. “The yen and the dollar should outperform.”

European leaders are divided and falling behind in their response to the sovereign-debt crisis, Frankfurt-based Moritz Kraemer, S&P’s managing director of European sovereign ratings, said on a Jan. 14 conference call.

The euro dropped Jan. 13 before S&P lowered the top ratings of France and Austria one level to AA+, with “negative” outlooks, while affirming the ratings of countries that included Germany, Belgium and the Netherlands. The company also downgraded Italy, Portugal, Spain and Cyprus by two steps and cut Malta, Slovakia and Slovenia by one level.

S&P analysts, outlining the decision to downgrade the sovereign credit ratings of nine of the euro area’s 17 members, said the challenges posed by the crisis were rising.

EFSF Rating

“The risks in the euro zone remain firmly tilted to the downside” in S&P’s forecast horizon of one-to-two years, meaning more downgrades are possible, Kraemer said.

The loss by France and Austria of their AAA credit ratings may erode the firepower of the euro-region’s bailout fund that’s needed to tap markets to finance aid for Greece, Ireland and Portugal. The EFSF may lose its top rating if any of the bailout fund’s guarantors face a downgrade, S&P said last month.

Futures traders increased bets to a record that the euro will weaken against the dollar. The difference between wagers that the shared currency would fall versus those that it would rise surged to 155,195 in the week ended Jan. 10, data from the Commodity Futures Trading Commission showed on Jan. 13.

Talks between Greek Prime Minister Lucas Papademos, Finance Minister Evangelos Venizelos and Charles Dallara, the managing director of the Institute of International Finance, will resume Jan. 18 as more work is needed, according to a Greek Finance Ministry official who declined to be identified.

‘Disorderly’ Default

Greece’s creditor banks last week broke off talks after failing to agree with the government about how much money investors will lose by swapping their bonds. The IIF, which represents private creditors, said Jan. 14 there is a “tentative plan” for Dallara and Jean Lemierre to return to Athens mid-week, “but this depends on developments over the next few days.”

“We remain concerned that Greece may suffer a disorderly default in March,” Mansoor Mohi-uddin, chief foreign-exchange strategist at UBS AG in Singapore, wrote in a Jan. 14 note. “A Greek default would have a major impact on the euro as it would spread contagion to other bond markets in the euro zone.”