Cracks appearing in euro currency union

Deep fault lines are running through Europe's currency union.

The euro, German Chancellor Angela Merkel warned last night, is facing its most serious crisis since its launch a decade ago. And financier George Soros warned that the 16-nation union “may not survive.”

Their comments came as European Union officials prepared to visit Athens today amid reports of an EU bailout whose effects could lead to further debt crises in the continent's troubled south.

Greece has been at the centre of a storm that has rattled currency and stock markets fearing a sovereign default because of its massive debts. While Greece has been the focus, other countries such as Spain, Portugal, Ireland and Italy are also causing concern.

The European Union's top finance official, Olli Rehn, will be in Athens today in a final effort to persuade Greece to force further cuts in public spending and services, increases in retirement ages, tax hikes and black-market crackdowns, after last week's austerity announcements failed to reassure bond markets. The harsh measures, which have already spurred unrest among the Greek public, may also be a precondition for a bailout package, in order to reassure EU taxpayers that Greeks are bearing a share of the burden.

Economy Minister Louka Katseli said that extra measures likely “will be announced soon.”

Athens only has enough funds left to keep its government solvent for two more weeks, after which it will need to refinance €20-billion ($28.7-billion) in loans due in April and May. It is currently preparing Greece's second bond issue of the year amid a collapsing credit rating and soaring borrowing costs.

Contradicting reports this weekend from German and French officials, Ms. Merkel strenuously denied that Germany, along with France and the Netherlands, is putting together a package that would see government-owned banks purchase that debt using government funds.

“That is definitely not the case. We've got a treaty that does not include any provision for bailing states out, to help them out of a jam. We can best help Greece at the moment by making clear that Greece has to do its own homework, just like it is doing at the moment.”

Ms. Merkel is due to meet with Greek Prime Minister George Papandreou in Berlin Friday, and Greek officials said yesterday that they expect a bailout deal to be announced by then.

European officials are adamant that they do not want to send the International Monetary Fund to rescue Greece using one of its bailout packages, which provide emergency loans in exchange for mandated austerity measures. This, they say, will be perceived as a failure of the euro zone to correct its own problems.

But economists warned that a homebrew bailout is unknown, and technically illegal, territory, and it could trigger a domino effect.

“The worst thing that can possibly happen is for European countries to assume the debt of Greece – the only way they can justify it is with the quid pro quo of appearing to get really tough on the Greeks, even though they don't have any instruments to do so, and that will build up resentment and bad faith and cause a series of missteps in other countries,” economist Charles Wyplosz, a monetary policy expert, said in an interview yesterday.

He is one of many observers, including some in Greece, who say an IMF rescue would be more prudent, as the organization has funds for just this purpose and would serve as a politically neutral target for Greek public anger – and, more importantly, an IMF bailout would not distort debt markets by creating investor expectations of future EU bailouts.

This is the first such crisis since the euro was launched as the currency of 16 countries a decade ago, and there is very little sense of how to resolve it.

In the past, when countries like Greece and Italy have faced debt crises, they've run the printing presses and devalued their currencies, an inflation-provoking move that causes economic devastation but leaves neighbouring countries untouched.

The euro was designed, in part, to prevent such politically motivated devaluations. But it was also designed without a central treasury: The European Central Bank cannot influence fiscal policy.

To make this work, Europe insisted on a strict rule: No euro zone country can bail out another by buying its debt. The challenge in Germany (the only euro zone economy strong enough to finance a major share of a bailout) is to do this without the appearance of state involvement.

German officials told reporters this weekend, in off-record comments, that this would likely be done by using German, French and Dutch state-owned banks, a scheme that would follow the letter if not the spirit of the no-bailouts law.

Leaders and ministers of all three nations publicly denied this weekend that any such plan is in the works.

But yesterday morning Christine Lagarde, the French Finance minister, suggested in a radio interview that a debt-purchase rescue is in the works.

“I have no doubts that Greece will succeed in refinancing itself through ways that we are exploring at the moment,” she said, suggesting that the scheme would involve “either private partners, or public partners, or both.”

Yuan Forwards Are Little Changed as China Checks Currency Gains

Feb. 24 -- China’s yuan forwards were little changed, following a two-day drop, on speculation the central bank will refrain from allowing the currency to appreciate in the first half of the year.

The country’s top decision-making body this week reaffirmed a “proactive” fiscal policy and a “appropriately loose” monetary stance, the state-run Xinhua News Agency reported Feb. 22. The central bank on Feb. 12 ordered lenders to set aside more deposits as reserves for the second time in a month to help contain inflation, a measure that takes effect tomorrow.

“The government won’t change its stance of keeping a stable currency or raise interest rates until at least the third quarter before its economic recovery is reinforced,” said Liu Xin, an analyst at the Hong Kong unit of Bank of Communications Ltd., China’s fifth-biggest lender. The increase in the reserve ratio is “gradually taking effect,” he said.

Twelve-month non-deliverable yuan forwards were at 6.6645 per dollar as of 10:44 a.m., indicating bets the yuan will strengthen 2.4 percent in a year. In the spot market, the currency traded at 6.8273, according to the China Foreign Exchange Trade System.

Forwards are agreements in which assets are bought and sold at current prices for delivery at a later specified time and date. Non-deliverable forwards are settled in U.S. dollars.

China’s National People’s Congress starts its annual meeting in Beijing on March 5, when the legislature will review the government’s annual work report, including the fiscal budget target for this year.

European investors pour money into gold

One of the things to bear in mind about markets is that they have a way of cutting through the BS and spin that so often passes for reality in today’s gullible world. Watching a market react to a batch of bullish news by selling off tells us one of two things:

1.) The market has already priced such news in and traders who bought ahead of the news are now taking profits as the novices rush in and get their heads handed to them.
2.) The market is weaker than meets the eyes and is primed for a harder fall.

Same goes for a market that moves higher on what is generally regarded as bearish news. The news comes out, the market moves lower and then rebounds with a fury. What is that saying?

1.) the market has already discounted the news and now traders who were short are booking profits
2.) The market is internally much stronger than meets the eye.

In the past two days we have seen gold hit with a one-two combination punch which could not knock it out even though it initially sent it reeling. The first slam was the obvious ploy by the IMF to knock the price of gold down just as the technical indicators were turning positive and momentum funds were becoming interested in moving over to the long side. The second punch was the Fed’s announcement of a ¼% hike in the discount rate which sent the Dollar soaring and the Euro sinking. Sadly for the gold bears, gold took both punches, dusted itself off of the mat, and then came back and did some counterpunching on its own.

Here is the key to this development – just watch the price of gold in Euro terms as was pointed out earlier this week when discussing the flaws in the Precherites analysis of the gold market.

Succinctly – gold is continuing to make one new record high after another when priced in terms of the Euro. While we here in the US are naturally focused on the Dollar price of gold, gold is performing superbly in terms of the European currencies.

Fears concerning the longer term viability of the European monetary union, which I might add were destined to come to the forefront due to the “one size fits all” model which cannot possibly work with a series of nations with such different cultures and differing economic models, have sent European investment money pouring into gold ( Did you not read years ago before any of this occurred when Jim wrote that the Euro was a basket of junk). FEAR is driving this phenomenon and fear of such nature is not going to be easily assuaged by rhetoric. Investors on the continent are doing what they always do when faced with a currency whose foundation is shaking – they are moving into gold in a very large way.

It is not just the continent, but also across the Channel, that investment money is pouring into gold – witness the rise in gold priced in terms of the British Pound, another currency which is rapidly losing investor confidence. It too is threatening to also make another all time high, something which it just did a mere two months ago.

Ditto for gold when priced in terms of the Swiss Franc. While it has not yet put in an all time high, it is currently at its highest level since 1980.

As you can see, anything related to Europe is struggling in terms of gold. The Fed may posture and preen and try to establish its “hawkish” bona fides, but the facts are that what is occurring as a crisis of confidence in Europe, is overriding obvious attempts by the official sector to derail the rise in gold.

Simply put – gold “just ain’t buying it” and is telling us that it WANTS to go higher. This is the kind of sentiment that is reflected when a market rejects a bearish dose of news. It is going to take a very huge concerted effort on the part of these enemies of gold to stuff the yellow metal into a box. The WAR is heating up and looks to become even more fierce. Fasten your seat belts.

Why Euro’s woes should scare us all

Last Thursday, Herman van Rompuy, the European Union’s new president, corralled Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president, into his office in Brussels to hammer out a statement that would pledge support for the tottering Greek economy.

Also present were George Papandreou, the Greek prime minister, Jean-Claude Trichet, president of the European Central Bank and Europe’s top money man, and an interpreter, who dived in when Sarkozy’s ability to express himself in his patchy English failed him.

This was EU realpolitik at its most obvious, the old Franco-German axis in full cry. The concern was understandable: as the two most powerful economies that use the euro, they could not afford to see the currency laid low by its weakest member, Greece.

Sarkozy was being typically assertive. He pushed hard for specific measures to bail out Greece, becoming “theatrical” at times, according to EU sources, as he pleaded with Merkel to accept the need for solidarity. She stood firm, knowing that more than 70% of her countrymen opposed coming to Greece’s aid.

When the meeting went into its second hour, officials started worrying that the other European leaders, including Gordon Brown, who were gathered in the nearby Solvay Library, one of Brussels’s architectural gems, for a routine summit, would get “jumpy”.

Eventually, after Jose Manuel Barroso, the European commission president, joined the meeting, a deal was struck. There would be an announcement but with no specifics. It would buy time — perhaps enough for the crisis to blow over — but if not, the eurozone’s finance ministers would be meeting on Monday to flesh it out. Even then, the announcement did not go well. Van Rompuy managed to fluff his lines and had to be gently encouraged by Barroso to repeat himself.

When he got the words out, Van Rompuy committed the 16 members of the eurozone to “determined and co-ordinated action if needed to safeguard financial stability”.

It fell far short of the rescue plan for the Greek economy the markets were looking for. The euro lost value against the dollar and the pound. The stock exchanges of Europe fell.

Papandreou was not happy either. On Friday, he criticised the EU for being “timid”, attacking the institutions which he said were “multiple doctors with differing prescriptions over the patient that is Greece”.

An analyst from Société Générale, one of Europe’s most august banks, continued the medical metaphor, saying that the rescue was a “sticking plaster” and that it merely put off “the ultimate denouement: the break-up of the eurozone”.

Others fear that the crisis could have even graver consequences. If Greece’s ills are not cured it could infect other countries — much as the banking crisis spread from institution to institution 15 months ago.

Those most in the spotlight are Portugal, Italy, Ireland and Spain, which with Greece make up the dealer’s acronym Piigs. Britain, which has a comparable budget deficit, when compared with GDP, to Greece, has also entered the frame.

If they were to suffer the same problems raising money as Greece has, then the already fragile recovery of the European, and indeed global, economy could be put in jeopardy.

This is why the seemingly distant issue of Greece’s economic wellbeing is being taken so seriously far beyond southern Europe.

THE mood in Athens last week was as gloomy as the weather. Heavy rain and strong winds put a dampener on plans by many Greeks to take advantage of a three-day weekend that marks the beginning of Orthodox Lent tomorrow.

The fiscal fast faced by most ordinary Greeks is set to last a lot longer than 40 days, as they are becoming only too aware. Even the divorce of Eleni Menegaki, one of the country’s most famous television personalities, has been relegated to the inside pages as the media have indulged in blanket coverage of the financial crisis.

On taking office last October, Papandreou inherited an economic nightmare. In August, the former Greek government had said it was on course for a budget deficit of 3.7% of gross domestic product. A month later, just ahead of the election, the figure was revised up to 6%.

By January, the figure was revised up again to 12.7% of GDP amid allegations that the previous numbers had been deliberately falsified.

It was the suddenness of the deterioration, and the suspicion it aroused about all Greece’s economic statistics, that spooked the markets and provoked a crisis for the euro.

When countries have their own currencies, these act as the safety valve when budget deficits soar. A fall in the currency — of the kind that has happened to sterling — helps economies grow out of recession and makes it cheaper for foreigners to buy the country’s government bonds and other assets.

Inside the euro, however, countries have no option of devaluing, other than leaving the currency entirely. If the markets decide they do not want to hold the country’s debt, the only recourse is a bailout — which the EU leaders offered in rhetorical if not practical terms last week.

For its part of the bargain, the Greek government needs to get its deficit under control, and quickly. Papandreou has introduced an austerity package to counter some of the more egregious problems.

Tax evasion is the norm in Greece. More than half of families declare incomes of below the €12,000-a-year (about £10,400) threshold for taxation and escape paying income tax. Most businesses also pay minimal amounts of tax.

One credible estimate puts tax evasion in Greece at €30 billion annually, equivalent to an eighth of the economy.

Another problem is the bloated public sector, which employs nearly one in three Greeks. Public workers also receive the equivalent of 14 salary payments a year, with bonuses at Christmas, Easter and in the summer. A pay and hiring freeze has been announced.

Despite muted protests on the streets of Athens last week, polls show majority support for the austerity measures the government says will get the budget deficit down to a manageable 3% of GDP in three years.

But there are few precedents for a country getting its public finances back in shape so quickly, particularly starting from such weakness. New figures show the Greek economy shrank by a further 0.8% in the final quarter of last year.

Turning round an entire economic culture, which has tolerated protectionism, nepotism and corruption, will be difficult. “Sometimes in Greece, we feel like we are a mix of the American Wild West and an African country,” said Stavros Alexakis, an Athens-based entrepreneur. “When one clan is in power, it controls everything, puts its own people in the best jobs, refuses checks and balances, and blames the problems on the other clan’s past governing.

“The Wild West only changed when the US federal government intervened to correct imbalances and injustices. Maybe this is what we need from the EU.”

THE fear that they were dealing with a bunch of cowboys was what concerned many leaders in Brussels last week. “Moral hazard” is what governments worried about when it came to bailing out the banks. The theory is that if bad behaviour is “excused” in the form of a bailout, then what is to stop others doing the same in the expectation that their bad behaviour will also be written off?

Bailing out Greece would be an even bigger moral hazard; rewarding a country for falsifying its own figures and living high on the hog when it could not afford it.

This was a problem for Merkel. “Will the Germans have to work not until they are 67, but also until 69, so the Greeks could enjoy their early pensions?” wrote Frankfurter Allgemeine Zeitung, Germany’s leading conservative broadsheet, which is close to Merkel’s Christian Democratic party (CDU), last week. The German pension age has already been raised to 67, while in Greece unions are calling for a strike because of attempt to raise the age from 61 to 63.

Jochen Felsenheimer of the Assenagon fund, one of Germany’s best-known credit analysts, said: “If you save Greece, it will lead to a destabilising of the currency union. The motivation in countries like Portugal or Spain to implement decisive measures against state debts will rapidly sink.” Ireland and Italy have serious budgetary problems. Will the EU be forced to bail them out too?

[It is unclear which direction this crisis will take next. It is unlikely, though, that the French and Germans would be prepared to suffer the upheaval the collapse of the euro would engender. That is safe for now.

However, there are sure to be knock-on political effects. Some in Brussels see the problems of the past few months as a reason to bind the EU’s members closer together. Lord Mandelson, the business secretary, claimed last week that the euro had been a “remarkable success” and that in the long term it would be in Britain’s interests to join.

“The danger is that a lot of people in Brussels see this as an opportunity rather than a threat,” said Mats Persson, director of the think tank Open Europe. “A decade ago, when the euro was founded, they said that we don’t have the tools now, but when a crisis comes along we will be able to take this forward.”

Having the tools in this case would mean extending the EU’s federal ambitions so it has a big enough central budget to be able to rescue its weaker members.

Last week, Van Rompuy indicated a desire for more central control by proposing that the EU be given greater oversight of national budgets and that summits between leaders take place every month rather than just four times a year.

It was long a criticism of eurosceptics that a single currency would not work among such diverse economies without political integration. Now, precisely such failings are being used as an excuse to increase political integration.

Although Brown stood aside from the deliberations, saying Greece was a problem for the eurozone, such developments would be impossible to ignore.

If a Tory government is elected, such creeping federalism could prove an early, and perhaps defining, test of David Cameron’s premiership.

Euro Falls for Fifth Week Versus Dollar on Greece, Growth

Feb. 13 -- The euro slid for a fifth week versus the dollar amid concern European Union efforts to avoid default by Greece will undermine the currency region and a report showed the EU’s economic recovery almost stalled.

The dollar rallied versus the yen after Federal Reserve Chairman Ben S. Bernanke said the central bank may raise the discount rate “before long” as economic stimulus measures are unwound. The euro yesterday touched an eight-month low versus the greenback as investors wait for the outcome of a Feb. 15-16 meeting of EU finance ministers that may provide details of a Greece bailout.

“It’s a very volatile process,” said Ron Leven, currency strategist at Morgan Stanley in New York. “No matter how this gets worked out, you will see more fiscal tightening, economic weakness and a European Central Bank that will be delayed in hiking rates. We are bearish on the euro.”

The euro dropped 0.3 percent to $1.3632 last week from $1.3678 on Feb. 5 for a fifth weekly decline, the longest streak in over a year. The 16-nation shared currency reached $1.3532 yesterday, the lowest since May 20. Against the yen, the euro rose 0.4 percent to 122.62, ending its four-week losing streak. The dollar rose 0.8 percent to 89.96 yen, from 89.25 last week.

The euro has fallen 4.8 percent against the dollar this year and 7.9 percent against the yen.

Futures traders this week increased bets to a record level that the euro will decline against the U.S. dollar.


Less Than Forecast


The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain, the net position, was 57,152 on Feb. 9, compared with 43,741 a week earlier, figures from the Washington-based Commodity Futures Trading Commission show.

The euro declined versus the dollar after the EU’s statistics office in Luxembourg yesterday said the region’s economy grew 0.1 percent in the fourth quarter, compared with economists’ forecasts for a 0.3 percent gain. It rose 0.4 percent in the third quarter.

The 16-nation common currency dropped on Feb. 11 as a statement issued by European leaders offered few details on how they would help Greece weather its debt crisis. Traders questioned how the EU would respond to a fresh wave of speculative attacks against Greece or countries such as Spain and Portugal, which are also struggling to cut their budget deficits.


‘Inevitable Break-Up’


The EU plan, brokered by German Chancellor Angela Merkel, Greek Prime Minister George Papandreou and European Central Bank President Jean-Claude Trichet, called for closer monitoring of the Greek economy.

“The statement bought the euro zone some time but unless something is done soon, downside pressure on the euro will persist,” said Geoffrey Yu, a currency strategist at UBS AG in London. The economic data will “give euro zone leaders an even greater incentive to get Greece sorted,” he said.

Southern European countries are trapped in an overvalued currency and suffocated by low competitiveness, a situation that will lead to the break-up of the euro bloc, according to Societe Generale SA strategist Albert Edwards.

The problem for countries including Portugal, Spain and Greece “is that years of inappropriately low interest rates resulted in overheating and rapid inflation,” London-based Edwards wrote in a report yesterday. “Any help given to Greece merely delays the inevitable break-up of the euro zone.”

Greece, representing 2.7 percent of the trading bloc’s $13 trillion economy, posted a budget deficit of 12.7 percent of gross domestic product in 2009, more than four times the EU’s 3 percent limit.


Real Fall


The dollar on Feb. 10 rose against the yen after Bernanke, in testimony prepared for the House Financial Services Committee, said the central bank may soon raise the discount rate as part of the “normalization” of Fed lending. He said a move in the discount rate won’t signal any change in the outlook for monetary policy.

“The Fed has been laying the ground work for how they will remove the monetary stimulus from the system,” said Andrew Busch, a global currency strategist at Bank of Montreal in Chicago. “It’s all baby steps in this path to normal monetary conditions.”

Futures trading in Chicago yesterday showed a 49 percent chance that the Fed will raise its target lending rate by at least a quarter-percentage point by its September meeting, up from 43 percent a week ago.

Brazil’s real fell yesterday as much as 1.6 percent to 1.8732 against the dollar, the biggest decline since Feb. 4, after China ordered banks to set aside more deposits as reserves for the second time in a month as part of an effort to cool growth in the world’s fastest-growing economy.

The reserve requirement will rise 50 basis points, or 0.5 percentage point, effective Feb. 25, the People’s Bank of China said on its Web site on Feb 11. The existing level is 16 percent for the biggest banks and 14 percent for smaller ones

Currency Buzz: Dollar Strikes Back In Asia

US Dollar has been slowly getting stronger in the Asian trades, turning up from a two session high of around 1.3800 even as European governments seemed to have agreed to help heavily indebted Greece. Traders preferred to keep their 'in dollar we trust' stance unabated as a break below the EMA 20 on the hourly charts bought some spillover gains for the greenback even as Asian equities were mostly higher.

Yesterday, the confidence in Europe's economic future rose for a 10th successive month in January. The European Commission's economic sentiment indicator rose by 2.1 points to 97.1 points across the 27-nation European Union, and hit 95.7 points (up 1.6 points) in the 16 countries that share the euro currency.

Among the largest economies, Italy and Britain -- which officially exited recession this week -- reported the biggest statistical increases in positive sentiment, of 4.2 points and 3.2 points respectively. Poland, Germany and France were narrowly up, but Spain -- the last major economy stuck in recession -- saw its level drop by minus 0.1 points.

The traders are still wary about a possible bailout for Greece, which would be the first rescue of a euro zone member in the currency's 11-year history. Such a support may have negative long-term ramifications and could have all the essential ingredients to lay the foundations for further imbalances and crisis

Meanwhile, yesterday, media reports stated that a U.S. sovereign-bond sale was part of broad retaliation measures under study by military personnel at the National Defense University and Academy of Military Sciences.

The US Dollar seems unruffled by all these proceedings and was last seen quoting at 1.3757 against the Euro, after hitting a high of 1.3742 just a while ago. The EMA 100 is around 1.3727 and may act a crucial support in case of a continued bullishness for the pair.

Euro hovers above eight month low

The euro hovered above an eight-month low in Asian trade after euro zone finance chiefs reassured their Group of Seven counterparts over Greece's deepening debt troubles.

The euro stood at $1.3626 in Asian trade this morning, after sliding to as low as $1.3586 in New York on Friday.

Dealers said the European currency received a modest boost from remarks by euro zone finance officials at the G7 talks in Canada on Greece's efforts to rein in its public debt of more than €294 billion.
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'The European members of the G7 have confirmed to the other partners of the G7 the substance and the significance of the debt-reduction plan put together by Greece, and that they are confident that it will be managed,' French Economy Minister Christine Lagarde said.

The single European currency has been hammered by worries that debt-ridden countries such as Greece, Spain and Portugal may be unable to restore stability to their public finances, having spent heavily to combat recession.

Investors are now looking ahead to the European reports on economic growth, due for release later this week.

FOREX-Euro hits 7-mth low vs dollar on debt woes

LONDON, Feb 4 (Reuters) - The euro hit a seven-month low against the dollar, knocked by concerns over the fiscal health of peripheral euro zone countries ahead of a European Central Bank policy decision later on Thursday.

Worries over Spain and Portugal have increased as investors speculate the two countries may face similar debt problems to Greece [ID:nLDE6121AC]. Such concerns pushed the safe-haven dollar to a six-month high versus a currency basket.

The euro EUR= hit its lowest level versus the U.S. dollar since June 2009 at $1.3827, according to Reuters data, with analysts expecting the single European currency to remain under pressure.

"The euro remains vulnerable and the market has now turned its attention to Spain and Portugal. Rallies have been short-lived and I am targeting a move towards $1.3745 in the short-term," said BNP currency strategist Ian Stannard.

Traders said moves in the euro could become volatile should ECB President Jean-Claude Trichet make any strong reference to fiscal problems in the euro zone. He will speak after a policy meeting at which the ECB is widely expected to keep interest rates on hold. [nLDE6110RC]

At 1040 GMT, the euro was trading down 0.3 percent on the day at $1.3845. Weakness was attributed to widening in peripheral euro zone bond yield spreads over German benchmarks. [nL9934677]

"Euro/dollar continues to trade off euro zone CDS/bond spreads and looks vulnerable," said ING currency strategist Chris Turner in a note.

STRONG U.S. DATA

Traders sold the single European currency on the view that dismal finances in euro zone countries may hinder any economic improvements in the region, increasing the probability that the U.S. economy may recover faster.

Strong U.S. data this week supported this view ahead of non-farm payrolls numbers due on Friday. A Reuters poll estimates 8,000 jobs were added to the economy last month. [ID:nN03191018]

The dollar .DXY hit a six-month high of 79.715 versus a basket of currencies, trading well above its 200-day moving average. Technical traders said the next resistance was at 80.07, which would be a 38.2 percent Fibonacci retracement of its fall from 89.624 to 74.17 in 2009.

The New Zealand dollar NZD=D4 hit a five-month low of $0.6939 after data showed the country's jobless rate rising to a 10-year high. [ID:nSGE6110KG]

The Australian dollar touched a six-week low of $0.8772 AUD=D4 after Australian retail sales fell more than expected in December. [ID:nSGE6120NF]

Sterling was down 0.3 percent at $1.5845 GBP=D4 before the Bank of England was expected to pause its quantitative easing programme at 1200 GMT. [ID:nLDE6122M4]

Risk-averse traders flocked to the yen, which pushed the dollar JPY= 0.5 percent lower to the day's trough of 90.59 yen. The euro EURJPY=R fell 0.8 percent to 125.50 yen.