June 1 (Bloomberg) -- The euro extended its longest monthly drop versus the dollar in 10 years amid concern mounting writedowns at Europe’s banks and efforts to reduce budget deficits will hamper the region’s economic recovery. The 16-nation currency fell before a report forecast to show Italy’s unemployment rose and after an index of executive and consumer sentiment tumbled. The European Central Bank warned yesterday of more bank losses as the credit crisis spreads. Australia’s dollar weakened after its central bank kept borrowing costs unchanged and amid concern slowing manufacturing growth in China will temper export demand. “As fiscal consolidations in countries such as Greece, Spain and Portugal take their toll on the region’s economy, the euro will struggle,” said Daisaku Ueno, president at Gaitame.Com Research Institute Ltd., a unit of Japan’s largest currency margin company. “Panicky, violent selling of the currency on sovereign-debt concerns has subsided, on the other hand.” The euro fell to $1.2268 as of 1:48 p.m. in Tokyo from $1.2306 yesterday in New York. It declined to 111.80 yen from 112.31 yen. Japan’s currency gained to 91.10 to the dollar from 91.26. Joblessness in Italy rose as Europe’s fourth-biggest economy fails to create jobs, swelling to a seasonally adjusted 8.9 percent in April from 8.8 percent the previous month, according to a Bloomberg News survey of economists. The statistics office Istat releases the data today. An index of executive and consumer sentiment in the 16 euro nations fell to 98.4 from 100.6 in April, the European Commission in Brussels said yesterday. Spending Cuts Europe’s currency dropped 7.4 percent against the dollar in May, its sixth-straight monthly decline. That’s the longest since a seven-month streak ending in April 2000. Concern that countries such as Greece will default has sparked speculation the 16-nation euro may break apart. Fitch Ratings on May 28 stripped Spain of its AAA credit grade, saying the nation’s debt burden is likely to weigh on economic growth. Greek Prime Minister George Papandreou has announced three rounds of deficit-reduction measures this year, helping to spur violent protests against cuts to wages and pensions. European governments and the International Monetary Fund called for fiscal disciple under a rescue package worth almost $1 trillion aimed at stopping the Greek debt crisis from spreading. Following the lifeline, Spain announced a 5 percent cut in public sector wages and Portugal pledged to slash wages and raise taxes to trim its budget deficit. Bank Writedowns The Frankfurt-based ECB said in its bi-annual Financial Stability Report yesterday that euro area banks may see another 90 billion euros ($110.4 billion) in net writedowns this year on loans and securities. The lenders will need to make provisions for losses of about 105 billion euros next year, which may be even bigger amid “heightened sovereign risks and possible second-round effects of the fiscal consolidation,” the central bank said. Europe’s currency slumped 8.1 percent this year against its major counterparts, according to Bloomberg Correlation Weighted Currency Indexes. The dollar appreciated 9.2 percent, while the yen advanced 12 percent. Fibonacci Retracement “Underlying sentiment toward the euro remains bearish amid the unabated debt crisis,” said Masakazu Sato, a foreign- exchange adviser at foreign exchange margin company Gaitameonline Co. “The euro has barely protected a 50 percent Fibonacci retracement line from a historical high in the past two downside tests, but there is no reason to believe that it can do so again.” Fibonacci analysis is based on a theory that prices rise or fall by certain percentages after reaching a high or low. Key percentages include 23.6, 38.2, 50 and 61.8. A break above resistance, where sell orders may be clustered, or below support, where there may be buy orders, indicates a currency may move to the next level. The euro reached as low as 82.30 U.S. cents in October 2000 and touched a record high of $1.6038 in July 2008. Asian currencies declined on concerns that a slowdown in China, the world’s third-largest economy, may cloud prospects for global growth and sap demand for higher-yielding assets. China’s PMI China’s Purchasing Managers’ Index fell to 53.9 in May from 55.7 in April, the Federation of Logistics and Purchasing said today. “This could be the first sign of China feeling the slowdown in Europe, and that’s going to affect the rest of Asia as well,” said Wan Suhaimi Saidi, an economist at Kenanga Investment Bank Bhd. in Kuala Lumpur. Australia’s central bank left its benchmark interest rate unchanged as Governor Glenn Stevens sought to gauge fallout from Europe’s debt crisis. Malaysia’s ringgit dropped 0.6 percent to 3.2835 per dollar and Australia’s dollar tumbled 0.8 percent to 83.88 cents. To contact the reporter on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net;

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