By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — The euro gave up a modest gain versus the U.S. dollar after a sale of short-term Spanish government debt saw a sharp rise in yields and weaker demand, while the yen gained after initially weakening on worries about the fate of Japan’s government.
The dollar index DXY +0.10% , which measures the U.S.unit against a basket of six major rivals, fell to 82.312 from 82.461 in North American action late Monday.
The euro EURUSD -0.2862% traded at $1.2488, down from $1.2501 on Monday and an intraday high earlier Tuesday of at $1.2530.
The shared currency gave up a modest gain versus the U.S. unit after Spain sold 3.08 billion euros ($3.85 billion) of three- and six-month Treasury bills.
The average yield on the three-month bills jumped to 2.36% from 0.85% in a May auction, while the six-month bill yield rose to 3.24% from 1.74%. The bid-to-cover ratio for both instruments also fell compared with the May auctions.
EU summit
Strategists said the weaker tone reflected low expectations that a summit meeting of European Union leaders on Thursday and Friday will effectively address the euro zone’s continuing sovereign-debt crisis.
The talks “are unlikely to address subjects such as common euro bonds or a more flexible use of both temporary and permanent rescue funds, as leaders have opposing opinions on these issues, which was further underlined in a speech by [German Chancellor Angela] Merkel on Monday,” said Richard Falkenhall, currency strategist at SEB in Stockholm.
“While expectations regarding the forthcoming summit are probably low based on previous experience, risks suggest a disappointing outcome. Consequently, this week’s meeting is likely to reinforce negative pressure on the common currency,” he said, in a research note.
Cyprus late Monday became the fifth euro-zone country to seek financial aid from its partners in the currency bloc. The request was widely anticipated after the country’s banking sector suffered sharp losses tied largely to its heavy exposure to Greek government debt.
The yen and Japan politics
The dollar traded at 79.34 Japanese yen USDJPY -0.3177% , down from ÂĄ79.67 late Monday.
Japan’s lower house of parliament passed a bill that would eventually double the country’s consumption tax to 10%, marking a hard-fought victory for Prime Minister Yoshihiko Noda.
But 57 lawmakers from the ruling Democratic Party of Japan voted against the bill, raising the possibility that those party members could exit the party, leaving Noda’s government vulnerable to a no-confidence vote, news reports said. Read about Japan tax hike.
The dollar briefly spiked versus the yen to trade as high as ¥79.79, boosted by worries about the outlook for Noda’s government.
Adam Cole, currency strategist at RBC Capital Markets in London, said fears the government could fall are misplaced.
“Voting against one bill, albeit an important one, is not the same as leaving the party and it is highly likely that a sufficient number of the rebels will remain in the DPJ for it to retain control of the lower house. We maintain that the legislation to raise the consumption tax is a positive development for Japan and [the Japanese yen] and [that the dollar/yen pair] remains a sell on rallies,” he said.
The British pound GBPUSD +0.1084% , meanwhile, traded at $1.5636, up from $1.5572 late Monday.
Sterling’s gains come despite the British government’s larger-than-expected May borrowing requirement of 17.9 billion pounds versus £15.2 billion in the same month last year.
Meanwhile, Bank of England Gov. Mervyn King on Tuesday told a parliamentary committee that he was pessimistic about the outlook for the euro zone.
He repeated a warning that U.K. banks would suffer a blow to their capital position if things went “badly wrong” in the shared currency area, reports said.
Strategists said sterling managed to shrug off negative news due in part to flows away from the euro.
“Firstly, strong demand for sterling from European investors and corporates seeking to reduce their exposure to the embattled single currency has been in evidence for quite a while, and this process still has a way to run yet,” said Michael Derks, chief strategist at FxPro in London.
“Secondly, high-net-worth investors and real money managers in Asia have been keen to diversify some of their wealth into hard currencies and assets, which partly explains why London property prices and gilts are so well-bid.”
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt.
