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Euro drops to lowest on french treaty rejection Original Source Link: (May no longer be active)
http://quote.bloomberg.com/apps/news?pid=10000006&sid=axwaqXLjR2vo&refer=homehttp://quote.bloomberg.com/apps/news?pid=10000006&sid=axwaqXLjR2vo&refer=home
Euro Drops to Lowest Since October on French Treaty Rejection
May 31 (Bloomberg) -- The euro fell to a seven-month low against the dollar on concern France's rejection of a European Union constitution will slow the region's economic integration. Polls show Dutch voters will reject the treaty tomorrow.
``There's a belief that the European project is under threat,'' said Mark Austin, head of global currency research in London at HSBC Holdings Plc, Europe's biggest bank by market value. ``There's no obvious reason why the euro will stop here given that sentiment is so negative.''
The euro extended its slide after French President Jacques Chirac replaced Jean-Pierre Raffarin as prime minister with his former chief of staff, Dominique de Villepin. The currency weakened to the lowest in more than four months compared with the yen and declined against more than a dozen major currencies, including the British pound and Swiss franc.
Against the dollar, the euro dropped 1 percent to $1.2342 at 9:30 a.m. in New York from $1.2475 yesterday, and touched $1.2310, the lowest since Oct. 13, according to currency-dealing system EBS. The euro may fall to $1.22 in two days, said Austin. It's down about 4 percent in May as reports also showed European growth is trailing the U.S. expansion for a fourth year.
``De Villepin is viewed by the market as a negative because he is a close ally of Chirac and seen as a strong supporter of the French economic model,'' said Ian Stannard, a currency strategist at BNP Paribas SA in London.
`Full Effect'
Today is the first full day of trading in foreign-exchange markets this week following national holidays yesterday in the U.K. and U.S. Hedge funds are among the biggest sellers of the euro today, said Austin at HSBC, the fourth-biggest trader in the currency market, according to Euromoney magazine.
``The economic backdrop is starting to look pretty scary in Europe; some of the political backdrop is starting to look a little scary as well,'' said David Durrant, an investment strategist in New York at Julius Baer Investment Management, with $22 billion of assets.
The firm sold euros the past month and a half, and ``we are not going to step back into that in the near-term,'' Durrant said. The euro will probably fall to $1.20 in June, he said.
The euro's drop below $1.2460, its high for much of last year, may accelerate the currency's slide and lead to a decline to the $1.2275 level, according to Daniel Katzive, a currency strategist in Stamford, Connecticut, at UBS Securities LLC.
`Negative Tone'
``This referendum has generated all the negative tone out of Europe that the horrific data of the last three or four months hasn't been able to generate,'' said Sydney-based Geoff Bowmer, a currency strategist at Macquarie Bank Ltd. ``The world has been long euro for the past two years. It's time not to be long euro anymore.'' An investor who is long an asset bets on it gaining.
European business confidence fell to a 21-month low in May as oil prices at around $50 a barrel and unemployment near a five-year high dimmed the outlook for growth, the European Commission said today.
``The market will have $1.20 in its sights,'' said Steve Barrow, a currency strategist at Bear Stearns Cos. in London.
The yen also advanced against the euro after government reports showed Japan's jobless rate fell to the lowest in more than six years and household spending rose. The yen rose to 133.49 per euro from 134.66. Against the dollar it traded near a six-week low of 108.25, compared with 108.
Japan's unemployment rate fell to 4.4 percent in April, the lowest since December 1998, from 4.5 percent the previous month. Spending by households headed by salaried workers increased 3.6 percent from March, the first gain in three months.
``There are a number of reasons why you'd be supportive of the yen,'' said Greg Gibbs, a Sydney-based senior currency strategist at RBC Capital Markets. ``If you look relative to Europe, the numbers out of Japan have been looking a lot better'' on the economy.
Relative Strength
The euro may recoup some of its losses after the vote because technical indicators suggest it has fallen too far, said Craig Ferguson, a currency strategist at Australia & New Zealand Banking Group Ltd. in Melbourne.
The currency's 14-day relative strength index against the U.S. dollar was at 27.01. The RSI is a gauge of momentum in a given period. A level above 70 or below 30 signals a change in direction.
A survey of 16,850 Dutch people yesterday found 53.2 percent of voters will reject the EU constitution, three days after a French vote resulted in 55 percent opposing.
Pressure on ECB
The constitution, which creates a European president and foreign minister for the first time and gives more power to the European Parliament, must be ratified by all 25 members of the European Union by November 2006 to take effect.
``Investors worry that rejection of a federal system for Europe will drastically reduce the likelihood of much-needed further reforms to improve economic growth,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. ``The fallout could include pressure on the ECB to cut interest rates.''
Losses in the euro may now extend to the June and August 2004 lows of around $1.1960 to $1.1990, he said.
European Central Bank policy makers may lower their 2005 growth estimate for the third time in six months when they meet on June 2, according to the median forecast of 21 economists polled by Bloomberg News. They will keep the benchmark interest rate at 2 percent, all 37 economists in a separate survey predicted.
Last Updated: May 31, 2005 09:43 EDT
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