By V. Phani Kumar and Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — The U.S. dollar turned up on Tuesday, rising towards its strongest level in almost two years, after reports that Egan-Jones downgraded Spain’s credit rating to BB- from B.
Analysts at GFT and TD Securities noted the move coincided with the downgrade.
“We are seeing the headline-driven market continue to prop up the greenback amid the growing threat of a Spain bailout paired with fears of a Greek exit,” said David Song, currency analyst at DailyFX.
The euro EURUSD -0.4729% fell to $1.2476, up from lowest since July 2010 and versus $1.2540 in holiday-thinned U.S. trading on Monday.
The ICE dollar index DXY +0.37% , which measures the greenback against a basket of six major currencies, jumped to 82.548, from 82.228 in North America late on Monday.
Last week, the index rose for a fourth week and touched its highest level since 2010. Read about dollar gains last week.
Kathy Lien, director of currency research at GFT, noted that Standard & Poor’s cut its credit rating on Spain shortly after Egan-Jones’ downgrade in April.
Spain was at the top of the list of investor worries already, as concerns rose that Spain’s economy isn’t growing enough, threatening to increase bad loans held by Spanish banks and bringing the need for an international bailout closer.
Spanish stocks sank again on Tuesday, following losses on Monday. The yield on Spain’s 10-year government bond ES:10YR_ESP -0.0016% rose as high as 6.49% during the session.
Some are discussing the potential for a bailout for Spain, though it could potentially be covered by the existing rescue funds and the International monetary Fund, said analysts at Societe Generale.
Still, “it will not dispel the worrying signs that European countries are, one by one, crumbling,” they wrote in emailed comments.
Analysts have also noted that traders are already heavily positioned for the euro to fall further, which may limit any further decline.
“The record level of euro-dollar short positions and the recent consolidation above $1.25 suggests that those who want to be short euros are already short,” said Lien wrote in a note. “In order to convince bottom fishers to join the selling, we would need a significant exacerbation of Europe’s sovereign debt crisis and unfortunately the most likely culprit will be Spain.”
U.S. data
In U.S. morning trading, the greenback pared an earlier advance after the S&P/Case-Shiller 20-city composite index showed U.S. home prices were unchanged in March. Read about Case-Shiller index.
Forecasts for U.S. economic data have improved in recent weeks, widening the gap in the growth outlook for the U.S. versus Europe, and other major economies. But some say the housing market will continue to be a drag on the U.S. economy, while others predict the bottom has been reached.
With that tepid enthusiasm for U.S. performance, the dollar is very sensitive to any signs expectations won’t be met.
“Prices still have further to fall and while we are closer to the bottom in prices than at any point in recent memory, price declines should still be expected,” said Dan Greenhaus, chief global strategist at BTIG, referring to Tuesday’s housing data.
The dollar had lost more ground after a report showed U.S. consumer confidence unexpectedly declined this month. Read more on consumer confidence.
Among other major currency pairs, the dollar USDJPY -0.0018% turned down to buy 79.42 Japanese yen from ÂĄ79.46 Monday.
The British pound GBPUSD -0.3351% changed hands at $1.5621, turning up compared to $1.5679.
Varahabhotla Phani Kumar is a reporter in MarketWatch's Hong Kong bureau.
Deborah Levine is a MarketWatch reporter, based in New York.
