World Business

Euro gains melt away on bailout concerns

By Justin Carrigan (China Daily)
Updated: 2010-05-12 13:23

Euro gains melt away on bailout concerns

A trader gestures at the London Metal Exchange.[Bloomberg]

LONDON: The euro lost all of Monday's gains on concern the $1 trillion bailout will hurt European economic growth. Stocks fell, paring the MSCI World Index's biggest advance in a year.

The euro fell 0.8 percent against the dollar at 7:09 am in New York, trading below the level it was at before the European Union-led aid package was announced early on Monday. The Stoxx Europe 600 Index fell 1.8 percent, after rising 7.2 percent on Monday. Futures on the Standard & Poor's 500 Index dropped 1.1 percent. Copper traded below $7,000 a metric ton.

The European Union's unprecedented bailout package is unlikely to be a "long-term solution" for the region, Marek Belka, the director of the International Monetary Fund's European department, said in Brussels.

"The euphoria of 24 hours ago has passed," Derek Halpenny, European head of global currency research at Bank of Tokyo Mitsubishi UFJ Ltd in London, wrote in a report.

"We are in little doubt that steps taken will offer the euro little support and the aid package does not change the fact that Spain and Portugal in particular will still have to undergo further painful austerity measures."

The euro fell against 11 of its 16 most-traded peers, dropping as low as $1.2670, compared with the $1.2755 level at which it closed last week.

The yen strengthened against all 16 of its major counterparts as investors sought the relative safety of the Japanese currency. The dollar advanced versus 15.

US Treasuries rose, snapping a two-day decline, with the 10-year yield sliding 7 basis points to 3.47 percent and the two-year yield dropping 6 basis points to 0.81 percent. German 10-year bund yields fell 5 basis points to 2.90 percent, while two-year yields were also 4 basis points lower, at 0.57 percent.

Traders are betting the plan to rescue debt-laden governments from Greece to Portugal will fail to reverse the euro's worst start to a year since 2000, forcing the European Central Bank will keep interest rates at a record low for longer. Economic growth in the nations that share the euro will lag behind the US by almost 1.5 percentage points next year, Bloomberg surveys of economists show.

The cost of protecting against a default by Greece fell. Credit-default swaps tied to Greek government bonds dropped 22 basis points to 562.5, according to CMA DataVision. The yield on the two-year Greek note fell 99 basis points to 8.16 percent, extending Monday's more than 1,000 basis-point decline.

Banco Santander SA led European banks lower, falling 5.6 percent in Madrid. Spain's biggest lender yesterday surged 23 percent, its biggest rally in 20 years. BHP Billiton Ltd, the world's largest mining company, retreated 2.7 percent in London. Deutsche Boerse AG slipped 1.6 percent in Frankfurt after reporting earnings that missed analysts' estimates.

The decline in US futures indicated the S&P 500 may pare some of Monday's 4.4 percent rally, which was the biggest advance since March 2009. The benchmark gauge for US equities is still down 4.7 percent from its April 23 high.

The MSCI Asia Pacific Index fell 1 percent, paring Monday's 1.5 percent advance. The MSCI Emerging Markets Index slipped 0.7 percent.

Copper for delivery in three months fell 2.7 percent to $6,930 a ton on the London Metal Exchange. Aluminum, nickel and zinc also retreated. Gold for immediate delivery advanced 1.1 percent to $1,217 an ounce. Crude oil for June delivery fell 1.6 percent to $75.58 a barrel in New York trading.