Euro Heads for Annual Decline

The euro weakened against the dollar, set for its first back-to-back annual decline versus the greenback since 2001, on concern Europe's debt crisis will weigh on the region's economic growth.

The 17-nation currency fell for a sixth day against the yen, its longest losing streak in a year, before a report next week that economists said will confirm European manufacturing shrank for a fifth month. The Australian and New Zealand dollars rose as stocks gained before reports forecast to show the U.S. economy is recovering. China's yuan climbed to a 17-year high on signs the central bank favors the currency's appreciation to prevent capital outflows.

“The euro is weaker as the focus is very much on Europe,” said Peter Rosenstreich, chief currency analyst at Swissquote Bank SA in Geneva. “The backdrop is still the euro-zone debt crisis and concerns about growth. The dark clouds are getting darker. We're seeing a death by a thousand cuts.”

The euro weakened 0.3 percent to $1.2920 at 9:36 a.m. in London, extending this year's decline to 3.5 percent. The common currency fell 0.5 percent to 100.15 yen after dropping to 100.06 yen yesterday, the weakest level since June 2001. The euro has slid 7.8 percent versus Japan's currency this year. The dollar was little changed at 77.53 yen.

A gauge of euro-region manufacturing was 46.9 in December from 46.4 the previous month, according to economists surveyed by Bloomberg News before Markit Economics releases the data on Jan. 2. A reading below 50 indicates contraction.

“We've been reasonably negative on the euro,” said Michael Turner, a fixed-income and currency strategist at Royal Bank of Canada in Sydney. “The euro area's probably in a mild recession already.”

Two years of summits have failed to contain a European debt crisis that has led to bailouts of Greece, Ireland and Portugal and now threatens Italy and Spain.

French President Nicolas Sarkozy will go to Berlin on Jan. 9 to resume talks with German Chancellor Angela Merkel on ending the debt crisis, an official familiar with the matter said. The leaders aim to complete revisions to Europe's fiscal rulebook by March, following decisions made at a Dec. 9 summit and are reassessing plans to cap the overall lending of their permanent rescue facility at 500 billion euros.

The euro has weakened 1.9 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen was the best performer, rising 5.1 percent, and the dollar advanced 1.7 percent.

Aussie, Kiwi

The Australian and New Zealand dollars rose for a second day on stocks gains and amid optimism a recovery in the U.S. economy will boost demand for higher-yielding assets.

The MSCI Asia Pacific Index of shares climbed 0.4 percent and the Stoxx Europe 600 Index rose 0.1 percent.

The Institute for Supply Management's factory index, a gauge of U.S. manufacturing, rose to 53.2 in December from 52.7 in November, a Bloomberg survey showed before the Jan. 3 report. Readings above 50 indicate expansion. Growth in the world's biggest economy will quicken to 2.1 percent in 2012 from 1.8 percent this year, according to a separate Bloomberg survey.

Riskier assets will rise “if we can confirm that the U.S. economy is on a recovery path from the economic data next week,” said Marito Ueda, senior managing director in Tokyo at FX Prime Corp., a currency margin company.

The so-called Aussie, advanced 0.2 percent to $1.0152, and New Zealand's currency gained 0.1 percent to 77.20 U.S. cents.

Chinese Yuan

The yuan advanced for a third day as the central bank set its reference rate 0.2 percent stronger at 6.3009 against the greenback, the highest level since a dollar peg ended in 2005.

Hong Lei, a spokesman for the foreign ministry, said on Dec. 28 China will continue to push for exchange-rate flexibility. Chinese manufacturing shrank less this month than in November, data showed today.

“The fixing may break through the key 6.3 level on the first trading day after the holiday,” following the spot rate, said Liu Dongliang, a senior analyst in Shenzhen at China Merchants Bank Co. “The yuan may appreciate about 3 percent at most next year.”

The yuan gained 0.4 percent to 6.2940 per dollar, the strongest since the country unified official and market exchange rates at the end of 1993.

Bloomberg News

Complete your profile to continue reading and get FREE access to Treasury & Risk, part of your ALM digital membership.

Your access to unlimited Treasury & Risk content isn’t changing.
Once you are an ALM digital member, you’ll receive:

Thought leadership on regulatory changes, economic trends, corporate success stories, and tactical solutions for treasurers, CFOs, risk managers, controllers, and other finance professionals
Informative weekly newsletter featuring news, analysis, real-world case studies, and other critical content
Educational webcasts, white papers, and ebooks from industry thought leaders
Critical coverage of the employee benefits and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor