Euro Falls After Moody’s Downgrades Outlook on Bulgarian Banks

May 26 (Bloomberg) -- The euro fell for the first time in seven days against the dollar after Moody’s Investors Service downgraded its rating outlook for two Bulgarian banks, reviving concern over the health of the European banking system.

The 16-nation currency also weakened versus the yen after Germany’s financial regulator said the debt of the country’s banks will blow up “like a grenade” unless they participate in the government’s bad bank plan, the Telegraph reported, citing an official. The South Korean won declined for a second day versus the dollar on concern North Korea will conduct more nuclear tests after the communist state said it successfully held an underground explosion yesterday.

“No country across the globe can maintain a AAA rating,” said Yuichiro Harada, senior vice president of the foreign- exchange division in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan’s second-largest banking group. “The credit-rating issue will continue to dominate the market and currencies or countries which are targets of speculation may come under pressure.”

The euro dropped to $1.3980 as of 11:52 a.m. in Tokyo, from $1.4017 yesterday in New York. It climbed as high as $1.4051 on May 22, the strongest since Jan. 2. The single currency weakened to 132.43 yen from 132.92 yen. The dollar was at 94.71 yen from 94.83 yen.

The won weakened for a second day versus the dollar, declining 0.8 percent to 1,260.75, according to Seoul Money Brokerage Services Ltd.

Credit Rating

The euro dropped for the first time in four days versus the yen after Moody’s said it placed the financial-strength ratings of DSK Bank AD and First Investment Bank Ltd. on review for possible downgrade due to “the likely deterioration of the Bulgarian operating environment.” DSK Bank is rated D+ and First Investment is ranked at D.

German banks have 200 billion euros ($280 billion) of bad debts, Jochen Sanio, president of Germany’s BaFin said last week after the regulator released its annual report, according to the Telegraph. Write-offs may reach 816 billion euros, twice the total reserves of the country’s financial institutions, the newspaper reported, citing an internal memo at the regulator’s office.

“That report over the German debt situation isn’t helping sentiment toward the euro,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., a part of the world’s largest interbank broker.

Korean Won

The won extended its decline from the highest in seven months against the dollar and South Korea’s benchmark stock index slumped for a fourth day after Yonhap News Agency reported South Korea isn’t ruling out the possibility the North will conduct further nuclear tests.

“This kind of news may trigger a knee-jerk reaction among those short-term players who wanted to buy Asian currencies,” said Taisuke Tanaka, managing director and foreign-exchange strategist in Tokyo at Nomura Securities Co., a unit of Japan’s largest securities broker. “But given the fact that most Asian countries enjoy huge current-account surpluses, this type of event won’t change the overall international capital flow.”

The impact on South Korea’s financial markets from North Korea’s nuclear test will be “limited,” Vice Finance Minister Hur Kyung Wook said today, adding the authorities are prepared to act if needed.