Dollar Rises After North Korea TV Says Leader Dies; Won Tumbles - BusinessWeek

December 19, 2011, 1:22 AM EST

By Masaki Kondo and Candice Zachariahs

Dec. 19 (Bloomberg) -- The euro declined toward an 11-month low versus the dollar before France and Spain sell bills this week amid concern the currency bloc's second- and fourth-largest economies will have their credit ratings cut.

The 17-nation euro traded near a two-month low versus the yen after Fitch Ratings lowered its outlook for France's credit ranking and said it may downgrade Spain. The dollar advanced against the pound before housing and consumer spending data this week forecast to show the U.S. economy is gaining momentum. The Australian dollar dropped before the country's central bank releases minutes tomorrow of its December meeting.

"The main focus is France and the pretty decent expectation that they will lose the AAA rating, and that would still hurt the euro," said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney, Australia's second-largest lender. "There's an immense amount of pessimism around for the euro."

The euro fell 0.2 percent to $1.3022 as of 11:30 a.m. in Tokyo from the close in New York on Dec. 16, after retreating to $1.2946 on Dec. 14, the least since Jan. 11. The common currency dipped 0.1 percent to 101.40 yen after touching 101.05 on Dec. 15, the lowest since Oct. 4. The dollar climbed 0.3 percent to $1.5502 per pound and rose 0.1 percent to 77.87 yen.

The European currency has depreciated 2.7 percent versus the dollar this year. The yen strengthened 7 percent in 2011 versus the euro and gained 4 percent against the dollar.

France is scheduled to sell as much as 7 billion euros ($9.1 billion) of bills today. Spain will auction government securities tomorrow maturing in three and six months.

Credit Ratings

Fitch reduced its outlook for France's credit rating to negative from stable on Dec. 16, saying the country's budget deficit and government borrowings make it more vulnerable to the region's debt crisis than other top-rated euro-zone countries. The ratings company separately placed other European nations, including Spain and Italy, on review for a downgrade.

European finance ministers will hold a conference call today to discuss 200 billion euros in additional funding through the International Monetary Fund and the mechanics of a so-called fiscal compact negotiated at a Dec. 9 European Union summit, according to two people familiar with the planning.

European Central Bank President Mario Draghi damped expectations that the bank will step up bond purchases to tame the sovereign debt crisis.

ECB Role

"People have to accept that we have to, and always will, act in accordance with our mandate and within our legal foundations," Draghi told the Financial Times in an interview, confirmed by the Frankfurt-based ECB. "The important thing is to restore the trust of the people -- citizens as well as investors -- in our continent. We won't achieve that by destroying the credibility of the ECB."

Futures traders increased their bets to a record level that the euro will decline against the U.S. dollar. The difference in the number of wagers by hedge funds and other speculators on a drop in the euro compared with those on a gain was 116,457 on Dec. 13, compared with so-called net shorts of 95,814 a week earlier, according to figures from the Washington-based Commodity Futures Trading Commission.

The euro has depreciated 0.8 percent this year against nine developed-nation counterparts, according to Bloomberg Correlation-Weighted Indexes. The yen has advanced 4.9 percent and the dollar has gained 1.9 percent.

U.S. Economy

Housing starts in the U.S. increased 1.1 percent last month from October when they declined 0.3 percent, according to economist estimates before the Commerce Department releases the data tomorrow. Consumer spending rose for a fifth month in November, adding 0.3 percent, another survey of economists showed before the government reports the figure on Dec. 23.

Federal Reserve Bank of Dallas President Richard Fisher said on Dec. 16 that he would argue against a third round of so- called quantitative easing if proposed.

"The U.S. dollar is appealing to us at the moment because it works as a safe haven, but also it is a positive when their data is improving because it keeps QE3 at bay, which is important," said Westpac's Callow.

The Australian dollar weakened against all 16 major counterparts before the Reserve Bank publishes minutes tomorrow of its meeting on Dec. 6 when policy makers cut interest rates for a second month.

"The market will be expecting the RBA to have downgraded the economic outlook to some degree to warrant the interest-rate cut," said Emma Lawson, a currency strategist at National Australia Bank Ltd. in Sydney. "What we'll be looking for is to what degree that was due to the European situation."

The Australian dollar fell 0.5 percent to 99.29 U.S. cents and slid 0.4 percent to 77.33 yen.

--With reporting by Mariko Ishikawa in Tokyo. Editors: Garfield Reynolds, Rocky Swift

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.