By Matthew Brown and Candice Zachariahs May 20 (Bloomberg) -- The euro failed to extend yesterday’s rally against the dollar on concern European governments are divided on how to contain financial turmoil in the wake of the sovereign-debt crisis. The common currency, which rebounded from a four-year low yesterday, swung between gains and losses as European stocks rose. Italy’s Il Sole 24 Ore newspaper, citing European Central Bank policy maker Jose Manuel Gonzalez-Paramo, said Germany didn’t tell the ECB before its surprise ban on some speculation in government bonds. The yen rose and the won dropped after a panel said a North Korean torpedo caused the sinking of a South Korean warship in March. “The euro is undergoing a crisis of confidence and its difficult to see what might reverse that trend,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo Mitsubishi UFJ Ltd. in London. “The market is very short euros, so there is a chance you could see a short bounce, but it’s unlikely to be sustained.” The euro fell as much as 0.8 percent to $1.2322, within two cents of the four-year low it reached yesterday. The currency was down 0.2 percent at $1.2392 at 10:15 a.m. in London after rising 1.8 percent yesterday. The 16-nation euro dropped 0.57 percent to 113.05 yen, while the Japanese currency strengthened 0.5 percent to 91.26 per dollar. A European report today may show consumer confidence worsened for the first time in three months, as the sovereign- debt crisis spreading from Greece spurred speculation that governments will rein in their spending. Undesirable ‘Volatility’ An index of confidence among consumers likely fell to minus 16 in May from minus 15 in April, according to a Bloomberg survey of economists before the European Commission data is released at 4 p.m. in Brussels. That would echo a report from the ZEW Center for European Economic Research on May 18 that showed German investor and analyst expectations plunged. Gonzalez-Paramo, who sits on the ECB’s executive board, told Il Sole that anti-crisis measures must be coordinated at a European Union level to be effective, and the current financial market volatility is “undesirable” and greater than usual. Luxembourg Prime Minister Jean-Claude Juncker, who leads the group of euro-area finance ministers, said he discussed concerns about the euro with Japanese Finance Minister Naoto Kan. Currency intervention isn’t an urgent topic, he said, speaking to reporters in Tokyo. Intervention Potential The euro has dropped 7.1 percent this year against developed-world counterparts, according to Bloomberg Correlation Weighted Indexes. “ECB intervention is very unlikely at these levels,” said Hardman. “It would take a rapid plunge towards parity for that to happen.” Nomura Securities Co. reduced its forecast for the euro to $1.15 by the end of this year from its previous call for $1.30. The single currency may drop to $1.18 by next month, down from an earlier estimate of $1.30 for the end of the current quarter, Taisuke Tanaka, a foreign-exchange strategist at Nomura, wrote in a report to clients today. “Even if the debt crisis eases, long-term investors will try to cut the weighting of euro-denominated assets, which will continue to weigh on the currency,” Tanaka said. Torpedo Attack The yen advanced against all of its 16 most-traded counterparts as concern that tensions on the Korean peninsula will escalate boosted demand for Japan’s currency as a refuge. A 25-member international panel said a 1,200-ton South Korean ship was split apart by an “external underwater explosion caused by a torpedo made in North Korea.” South Korea has “undeniable evidence” that North Korea was responsible for the sinking, President Lee Myung Bak told Australian Prime Minister Kevin Rudd, according to a statement from the President’s office. He pledged to take “stern actions” against North Korea, according to the statement. “News that a North Korean torpedo attack sank a South Korean warship may spark geopolitical risk,” said Takashi Kudo, Tokyo-based general manager of market information at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “The bias is for the yen to be bought.” South Korea’s won weakened against all major peers, losing 2.6 percent against the dollar and 3 percent versus the yen. ‘Necessary Action’ “We’re ready to take necessary action” to save the euro, German Chancellor Angela Merkel said in a speech today in Berlin. Germany’s ban on so-called naked short sales, which lasts until March 31, 2011, applies to government debt and shares of 10 banks and insurers, financial regulator BaFin said May 18. When securities are sold naked, the trader doesn’t borrow the assets before submitting a sell order. “The question of European Union unity following Germany’s unilateral naked short-selling ban has investors particularly on edge,” Brian Kim, a currency strategist in Stamford, Connecticut, at UBS AG, wrote in a research note yesterday. “We are still negative on the euro.” Euro area policy makers last week unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases to forestall defaults of the region’s most indebted countries, including Greece, Spain and Portugal. The euro has fallen versus the dollar in six of the past eight days amid prospects mandated spending cuts will curtail growth. Spain this month unveiled the biggest cuts in at least 30 years and Portugal pledged to slash wages and raise taxes. Italian Prime Minister Silvio Berlusconi promised yesterday a “very rigorous” control over the country’s public accounts and cuts to “superfluous spending and privileges.” The euro’s slide is good for Europe’s biggest exporters, Berlusconi said at a news conference in Rome. Recent currency moves “allow us to look at the future with optimism, rather than excessive pessimism,” he said. 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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