Euro Has Biggest Drop Since August on French Treaty Rejection
May 31 (Bloomberg) -- The euro fell the most since August 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 oppose 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.''
Europe's common currency 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 euro fell 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.
The euro dropped 1.4 percent to $1.2301 at 2:29 p.m. in New York from $1.2475 yesterday, and earlier touched $1.2297, the lowest since Oct. 13, according to currency-dealing system EBS. It's the biggest one-day decline since Aug. 23.
The euro may fall to $1.22 in two days, said Austin. It's down about 4.2 percent in May as reports also showed European growth is trailing the U.S. expansion for a fourth year.
De Villepin ``is not exactly going to turn a new leaf,'' in terms of economic policy, said Adrian Hughes, a currency strategist at Royal Bank of Scotland Plc in London. ``It's going to be more of the same; there is no reason to see it as a positive.''
`Scary' Backdrop
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, which according to Euromoney magazine is the fourth-biggest currency trader.
``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.
His 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.
European business confidence fell to a 21-month low in May as oil prices at around $50 a barrel dimmed the outlook for growth, the European Commission said today.
The euro's drop below $1.2460, its high for seven months last year, may accelerate the currency's slide and lead to a decline to the $1.2275, according to Daniel Katzive, a currency strategist in Stamford, Connecticut, at UBS Securities LLC.
`Negative Tone'
Today's decline began in Asian trading after pre-set orders to sell it were triggered at $1.2450, said Alex Sinton, a trader at ANZ Investment Bank in Auckland.
``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. The euro gained against the dollar for three years through 2004.
The dollar remained higher after the Conference Board said its index of U.S. consumer confidence rose to 102.2, from a revised 97.5 in April. Separately, the National Association of Purchasing Management-Chicago said its Business Barometer fell this month to 54.1, from 65.6 in April.
``I don't see enough growth or enough confidence in the U.S. economy relative to the rest of the globe'' to extend the dollar's rally beyond $1.20 per euro, said Jan Faller, a global fixed-income portfolio manager in New York at Deutsche Asset Management, with $744 billion in assets.
Yen Advances
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 gained to 133.32 per euro from 134.66. Against the dollar it traded at 108.38 yen, 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.
`Supportive' of Yen
``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.
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.
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.
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