Euro Falls to 3-Month Low After Hollande Election

Sunday, 06 May 2012 07:02 PM

 

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The euro fell to a three-month low as French Socialist Francois Hollande was elected President and Greek voters flocked to anti-bailout parties, stoking concern austerity efforts in Europe may be derailed.

Europe’s shared currency extended last week’s drop, the biggest in a month. Hollande got about 52 percent against about 48 percent for incumbent Nicolas Sarkozy, according to estimates by four pollsters. The Greek results cast doubt on whether the two main parties, New Democracy and Pasok, can form a coalition to implement spending cuts to ensure the flow of bailout funds. Data last week that showed euro-region services and manufacturing output contracted more than estimated in April, adding to signs of a deepening economic slump.

“We have continued the risk off,” said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York. “The data has been largely poor recently, and we are adding to that a Hollande victory and some confusion in Greece. The Hollande victory was largely expected, but it does act as a trigger to increase demand for the dollar.”

The euro declined to $1.2955 at 7:35 a.m. Tokyo time. It fell 1.3 percent last week, the most since the five days ended April 6. The common currency was at 103.31 yen, from 104.49 yen, dropping 1.8 percent last week. The dollar declined 0.2 percent to 79.67 yen.

Austerity Measures

Austerity measures aimed at stemming Europe’s turmoil have driven economies from the Netherlands to Spain back into recessions, emboldening politicians campaigning for growth. The elections occurred as 386 billion euros ($500 billion) of emergency loan packages for Greece, Ireland and Portugal and a focus on deficit reduction failed to stem Europe’s sovereign debt crisis.

The euro has declined 0.4 percent over the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar has risen 0.7 percent and the yen has advanced 3.5 percent, the indexes show.

Hollande, 57, has called for a re-negotiation of a budget- discipline pact crafted by European leaders in March, saying it needs to place more emphasis on growth.

France’s budget deficit will probably be 4.5 percent of growth domestic product this year, according to the median in a survey of seven forecasts compiled by Bloomberg. That compares with 1 percent in Germany, 5.8 percent in Spain and 7.3 percent in Greece, separate surveys show.

Jobless Rate

With joblessness at a 12-year high and the national debt at a record level, Sarkozy and Hollande focused their battle on the economy and Europe’s debt crisis. In his last rally, Sarkozy stuck to themes he’s favored after record gains in the first round for the National Front party: control of immigration, respect for authority, the Christian roots of France, and the value of work.

“France has risks whoever wins the election, because they are facing a lot of economic headwinds,” Kathy A. Jones, a New York-based strategist at Charles Schwab Corp. said in a May 3 phone interview. “Confidence will be shaken by a change and it will throw Europe’s fiscal pact into question.”

Bond yields suggest Hollande may maintain market confidence. Ten-year French debt yields 124 basis points more than comparable German securities. That’s down from about 145 basis points after he won the first round April 22 and lower than the 133 basis points at the start of the year.

Greek Election

New Democracy won 19.2 percent of the vote and gained 109 seats in the 300-seat legislature, according to official projections from the Interior Ministry based on partially counted returns. Anti-bailout party Syriza gained 16.3 percent and 50 seats, while socialist Pasok, with 13.6 percent, gained 42 seats.

On the basis of the initial figures, New Democracy and Pasok, who have both supported imposing austerity measures in return for bailout funds from the European Union and International Monetary Fund, would gain a majority of 151 in the 300-seat parliament if they chose to form a coalition.

With the nation dependent on bailout funds to stay in the euro, the next government will need to find cuts worth 5.5 percent of gross domestic product in 2013 and 2014.

Under the terms of the 130 billion-euro aid package, which was accompanied by the biggest debt restructuring ever, international lenders expect to hear in June how Greece will achieve 11.6 billion euros of savings for those years.

‘Intensifying Backlash’

“Fears about more brinkmanship by the Greek politicians at times of intensifying backlash against fiscal austerity in the euro zone could add to the uncertainty about the near-term outlook for the euro,” Valentin Marinov, head of European and G-10 currency strategy in London at Citigroup Inc., wrote in a note to investors on May 4. A victory for Hollande “could embolden other politicians in the euro zone to voice their opposition to aggressive fiscal austerity.”

After shrinking in the final three months of 2011, Europe’s economy may have slipped into a recession in the first quarter. European Central Bank President Mario Draghi said on May 3 that the economic outlook has become “more uncertain,” and left open the option of further stimulus. The ECB also kept the benchmark interest rate at a record low 1 percent that day.

“The election outcomes in France and Greece may reinforce the soft current toward the euro,” Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, said before the results. “It creates political uncertainty in terms of whether the new governments will remain as committed to fiscal consolidation plans as the previous ones.”

Bank of Tokyo-Mitsubishi forecasts the euro will depreciate to $1.25 over the next three to six months and then to $1.20 over the next year, Hardman said.

© Copyright 2014 Bloomberg News. All rights reserved.

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