By Matthew Brown and Candice Zachariahs May 19 (Bloomberg) -- The euro slid to a four-year low and the pound reached its lowest level in 13 months on concern the region’s debt crisis will worsen as Germany limited short sales and Chancellor Angela Merkel said Europe’s currency is at risk. The yen gained against 15 of its 16 major counterparts amid heightened demand for safety after Germany prohibited so-called naked short-selling on sovereign debt and some financial stocks, while the Bank of Italy allowed lenders to exclude losses on government bonds. New Zealand’s dollar dropped for a fourth day as central bank Governor Alan Bollard said gradual depreciation of the currency was desirable. “If you don’t have a chance to express a negative view through other assets, you do it through the euro,” said Geoffrey Yu, a foreign-exchange strategist at UBS AG in London. “The market may be wondering if Germany is trying to hide something, but this looks like a populist step that undermines faith in European policymaking.” The euro fell as low as $1.2144, the weakest since April 17, 2006. It recovered some of its drop to trade at $1.2169 at 9:30 a.m. in London, down from $1.2202 yesterday in New York. It declined 1.1 percent to 111.33 yen. The yen appreciated to 91.48 per dollar from 92.23 yesterday, after reaching 91.36, the strongest level since May 7. The dollar climbed as high as $1.4239 versus the pound, the strongest since March 30, 2009, and reached C$1.0448, the strongest level against Canada’s currency since May 7. Yen, Asian Currencies The yen rose and Asian currencies fell as European stocks extended a global rout, spurring investors to flee emerging- market assets. The Stoxx Europe 600 Index slumped 2.1 percent, bringing its decline from an April 15 peak to 9.8 percent. The Australian dollar was the biggest loser among major currencies, sliding 2.5 percent against the yen and 1.7 percent versus the greenback. The German ban on naked short sales, which lasts until March 31, 2011, also applies to the shares of 10 banks and insurers including Allianz SE and Deutsche Bank AG, financial regulator BaFin said late yesterday, citing “exceptional volatility” in euro-area bonds. When securities are sold naked, the trader fails to borrow the assets before sending an order to sell. Investors own naked credit-default swaps when they don’t hold the bonds the derivatives are linked to. The ban “plays into market doubts about European policy- making credibility,” Brown Brothers Harriman & Co. strategists led by Marc Chandler in New York wrote in a research report today. “The U.S. dollar and the yen are in demand in the current context.” Merkel, Italy Merkel said the European debt crisis could have global consequences. Speaking to parliament in Berlin today and opening a debate on the euro-region bailout, she said Europe needs a “new culture of stability” to protect the euro. The Bank of Italy said in a statement that Italian banks can opt for new rules aiming at “neutralizing” the effect of capital losses on European government bonds. The U.S. Securities and Exchange Commission filed proposed rules under which exchanges would halt trading in individual stocks that swing more than 10 percent. The 16-nation euro has dropped 8.9 percent this year against developed-world counterparts, according to Bloomberg Correlation Weighted Indexes. “The euro has become a key gauge for risk sentiment, and its bottomless declines now affect the direction of growth currencies,” said Masahiro Ito, senior manager of foreign- exchange sales and marketing at Central Tanshi FX Co., a unit of Japan’s largest money broker. “It will take considerable time before the single currency can regain investor confidence.” Relative Strength Europe’s leaders last week unveiled a loan package worth nearly $1 trillion and a program of bond purchases to forestall defaults in debt-ridden countries, including Greece, Spain and Portugal. The euro’s decline pushed it towards a support level at $1.2134, a 50 percent Fibonacci retracement of the rally from its all-time low of 82.3 U.S. cents on Oct. 26, 2000, to its lifetime high of $1.6038 on July 15, 2008. “We identify further support at $1.2135 and then the important $1.20,” Brown Brothers Harriman said. Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low. A support level is where orders to buy a bond and its related securities may be grouped. The currency has fallen in six of the past seven days on anticipation that national spending cuts will curtail economic growth. The currency’s 14-day relative strength index against the dollar was at 21 today, the lowest since October 2008. Readings below 30 on the gauge indicate an asset’s value has fallen too fast and may be poised to rebound. Kiwi Depreciation New Zealand’s dollar fell for a fourth day versus its U.S. counterpart as central bank Governor Bollard called for reduced reliance on foreign borrowing and a narrowing of the deficit. “The central bank is trying to endorse a weaker currency and signal that they may not be as much in a rush to raise interest rates,” said Kathy Lien, director of currency research at online currency trader GFT Forex in New York. “Like everyone else in the world, they’re worried about the global financial markets and what growth could be like six months from now.” New Zealand’s currency fell to 68.31 U.S. cents, the weakest since Feb. 9, before trading at 68.44 cents. Australia’s dollar declined to 85.18 U.S. cents, after earlier dropping to 85.12 cents, the least since Sept. 7, 2009. Australian consumer confidence fell in May to the weakest since June 2009, according to a Westpac Banking Corp. and Melbourne Institute survey released today in Sydney. To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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