Euro Falls After Portugal Bailout

The euro fell from its strongest in more than 14 months versus the dollar after Portugal’s request for aid highlighted diverging economic prospects in the region as the European Central Bank prepares to raise interest rates.

The currency of the 17-member bloc declined against 12 of its 16 major peers after Portugal’s Prime Minister Jose Socrates said in a televised statement late yesterday that his nation was seeking financial assistance. A rescue package for Portugal may be worth as much as 75 billion euros ($107 billion), two European officials with knowledge of the situation said.

“Portugal has put some selling pressure on the euro because it just reminds the market that the fiscal issues in peripheral Europe are structural -- you can keep propping up the debt market as long as you want but it’s not going to solve the structural issues,” said Chris Walker, a foreign-exchange strategist at UBS AG in London. “The ECB will still press ahead with normalizing rates in spite of the debt issues. If they’re fairly hawkish the euro should stay well supported.”

The euro declined as much as 0.4 percent to $1.4280 before trading at $1.4283 as of 8:43 a.m. in London. The shared currency climbed to $1.4349 yesterday, the strongest level since Jan. 19, 2010.

Europe’s currency has gained 6.8 percent versus the dollar this year as economic growth in Germany and accelerating inflation spurred investors to raise bets that rates would be increased to curb consumer prices, which reached a two-year high of 2.6 percent in March.

“We definitely see further upside potential in the euro exchange rate,” said Chris Scicluna, deputy head of economic research at Daiwa Capital Markets Europe in London. “Our central forecast is for one rate hike per quarter from the ECB this year.”

The Frankfurt-based ECB will increase its main rate by 25 basis points to 1.25 percent today, according to all 57 economists surveyed by Bloomberg. Daiwa Capital expects the ECB to raise its main rate to 1.75 percent by year-end, boosting the euro to $1.50, Scicluna said.