Japan’s yen recovers after tax vote endangers leadership
By William L. Watts and Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — The euro gave up a modest gain versus the U.S. dollar Tuesday after a sale of short-term Spanish government debt saw a sharp rise in yields and weaker demand.
The Japanese yen gained after initially weakening on worries about the fate of Japan’s government.
The dollar index DXY -0.02% , which measures the U.S.unit against a basket of six major currencies, rose to 82.535 from 82.461 in North American action late Monday.
The euro EURUSD -0.19% declined to $1.2475 from Monday’s $1.2501. The shared currency gave up a modest gain after Spain sold 3.08 billion euros ($3.85 billion) of 3- and 6-month treasury bills.
The average yield on the 3-month bills jumped to 2.36% from 0.85% in a May auction, while the 6-month yield rose to 3.24% from 1.74%. The bid-to-cover ratio for both instruments also fell compared with the May auctions.
The country’s bond yields have been rising sharply lately, raising worries about how long Spain can finance itself in the public market before needing to ask for a bailout from its neighbors.
Spain sold more debt than planned, ”but it had to pay up,” said Kathleen Brooks, research director at Forex.com. “This is unsustainable. Although there are buyers when Spain’s debt becomes cheap enough, the higher yields could lead the Spanish authorities to decide it’s cheaper to go down the bailout route.“
EU summit
Strategists said the weaker tone reflected low expectations that a summit of European Union leaders convening Thursday and Friday will effectively address the euro zone’s 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.
Japanese politics, yen
The U.S. dollar slipped to 79.48 yen USDJPY -0.25% 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 full story about Japan’s 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 that 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 +0.21% came off its highs to buy $1.5595, up from $1.5572 late Monday, continuing to benefit from an outflow of capital from the euro zone.
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt.
Deborah Levine is a MarketWatch reporter, based in New York.
