Euro Near 2-Year Low Before Region’s Production Data

The euro traded 0.2 percent from a two-year low before data forecast to show inflation slowed in Germany and manufacturing stagnated in the euro area.

The 17-nation euro declined to a one-month low against the yen after as Germany’s top court said a decision on whether to suspend legislation for the euro bloc’s permanent bailout fund and fiscal treaty could take months. Demand for the U.S. dollar was limited before the Federal Reserve releases minutes of its June 20 meeting when it expanded a program that replaces short- term Treasuries in its portfolio with longer-term debt.

“I would imagine the euro would test new lows,” said Hans Kunnen, chief economist at St. George Bank Ltd. in Sydney. “The constant news of crisis just saps business confidence.”

The euro was little changed at $1.2254 as of 10:13 a.m. inTokyo from yesterday, when it touched $1.2235, the lowest since July 2010. The common currency touched 97.10 yen, the least since June 5, before trading at 97.12, 0.2 percent lower than yesterday’s close. The dollar declined 0.2 percent to 79.26 yen from yesterday.

In Germany, a final reading of consumer price inflation in June, calculated using a harmonized European Union method, was at 2 percent, economists in another survey said before the Federal Statistics Office in Wiesbaden releases its figures today. That would be the lowest rate since January 2011 and unchanged from the level indicated in the preliminary reading released June 27.

Industrial production in the euro area probably failed to grow in May after two months of decline, according to median estimate of economists in Bloomberg News survey before the data is reported tomorrow.

Court Challenge

The Federal Constitutional Court in Karlsruhe heard arguments yesterday on whether to put German approval of the European Stability Mechanism and fiscal pact on hold until it rules on the legality. Both houses of parliament approved the new laws on June 29 with a two-thirds majority. German President Joachim Gauck withheld his signature due to legal challenges that were discussed at the hearing.

Court President Andreas Vosskuhle signaled the court may take a more deliberative approach to its initial decision, potentially further delaying the ESM from coming into force.

“Everything is taking a long time in Europe,” said Kazuo Shirai, a trader at Union Bank NA in Los Angeles. “The market is getting a bit impatient and questioning the prospects for implementation of the measures being announced. The euro will eventually move below $1.20.”

Spain’s Banks

The euro slid even as European officials laid the groundwork for possible purchases of Italy’s bonds and fast- tracked aid for Spain’s banks. Finance ministers at a meeting in Brussels worked out a way for euro bailout funds to intervene in bond markets and said the first 30 billion euros ($37 billion) of 100 billion euros in rescue loans will start flowing to Spanish banks this month.

The finance ministers gave Spanish Prime Minister Mariano Rajoy’s government an extra year, until 2014, to drive his nation’s budget deficit below the euro limit of 3 percent of gross domestic product.

European officials have provided “another short-term fix but the problem is still there,” said St. George’s Kunnen. “I don’t think legislators are keeping up with the market realities of Spain and potentially Italy.”

The Fed bought $2.3 trillion of bonds in two rounds of so- called quantitative easing, or QE, from December 2008 to June 2011, seeking to cap borrowing costs and stimulate the economy. The central bank today will release minutes of last month’s policy meeting where Chairman Ben S. Bernanke indicated another round of QE remains an option.

Agency Debt

Among other tools at its disposal, the Fed could fight the economic slowdown by making additional purchases of agency mortgage-backed securities and other longer-maturity securities, San Francisco Fed President John Williams told the OregonIdaho, and Nevada Bankers’ Associations this week.

The Australian dollar fell against all 16 major peers as Asian stocks declined for a fifth day, reducing demand for riskier assets. The MSCI Asia Pacific Index (MXAP) of stocks slid 0.3 percent, after Standard & Poor’s 500 Index dropped 0.8 percent yesterday.

The so-called Aussie slid 0.1 percent to $1.0184 and lost 0.3 percent to 80.72 yen.

(Curtsey : Bloomberg)

Rupesh Yatesh Dalal
Head Research Department

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