By Candice Zachariahs and Ron Harui May 19 (Bloomberg) -- The euro reached the weakest level in more than four years and the pound slumped to a 13-month low as Germany’s ban on some speculative sales triggered concern that Europe’s debt crisis will worsen. The yen gained against all 16 major counterparts amid heightened demand for safety after Germany prohibited naked short-selling and speculating on sovereign debt, and the Bank of Italy allowed lenders to exclude losses on government bonds. New Zealand’s dollar dropped a fourth day as central bank Governor Alan Bollard said gradual depreciation was desirable. The euro pared losses on speculation recent declines were excessive. “If you don’t feel like you can sell bonds and equities in Europe, you’re left with selling the euro to express a negative view,” said Greg Gibbs, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney. The German ban “creates a view that the authorities sense bigger problems than what may appear on the surface, creating more nervousness and fear.” The euro fell to as low as $1.2144, the weakest since April 17, 2006, before trading at $1.2196 as of 1:32 p.m. in Tokyo from $1.2202 yesterday in New York. It declined 0.4 percent to 112.12 yen. The yen gained to 91.92 per dollar from 92.23 yesterday, after reaching 91.56, the highest level since May 7. The dollar climbed to as high as $1.4239 versus the pound, the strongest since March 30, 2009, and to as much as C$1.0448, the most since May 7. Yen, Asian Currencies The yen rose and Asian currencies fell as regional stocks extended a global rout, spurring investors to flee emerging- market assets. The MSCI Asia Pacific Index slumped 1.4 percent, down more than 11 percent from its April 15 peak. South Korea’s won was the biggest loser among major currencies, sliding 1 percent against the yen and 0.7 percent versus the greenback. The German ban, which lasts until March 31, 2011, also applies to the shares of 10 banks and insurers including Allianz SE and Deutsche Bank AG, financial regulator BaFin said late yesterday in an e-mailed statement. The step was needed because of “exceptional volatility” in euro-area bonds, BaFin said. When securities are sold naked, the trader fails to borrow the assets before sending an order to sell. Investors own naked credit-default swaps when they don’t hold the bonds the derivatives are linked to. “The regulatory step in Germany did little to soothe speculative selling on the euro and rather underscored the lack of solidarity in the euro zone,” said Mitsuru Saito, chief economist in Tokyo at Tokai Tokyo Securities Co. “No one can dismiss entirely the worst-case scenario in which the single currency will fall apart.” Italy, U.S. The Bank of Italy said in a statement that Italian banks can opt for new rules aiming at “neutralizing” the effect of capital losses on European government bonds. The U.S. Securities and Exchange Commission filed proposed rules under which exchanges would halt trading in individual stocks that swing more than 10 percent. The 16-nation euro dropped 8.9 percent this year against developed-world counterparts, according to Bloomberg Correlation Weighted Indexes. “The euro has become a key gauge for risk sentiment and its bottomless declines now affect the direction of growth currencies,” said Masahiro Ito, senior manager of foreign- exchange sales and marketing at Central Tanshi FX Co., a unit of Japan’s largest money broker. “It will take considerable time before the single currency can regain investor confidence.” Merkel Speech German Chancellor Angela Merkel will give a speech in parliament today to open a debate on Germany’s contribution to the 16-nation region’s bailout plan. Regional leaders last week unveiled a loan package worth nearly $1 trillion and a program of bond purchases to forestall defaults in debt-ridden countries, including Greece, Spain and Portugal. The currency has fallen in six of the past seven days amid prospects mandated spending cuts will curtail growth. The currency’s 14-day relative strength index against the dollar was at 21 yesterday, the lowest since October 2008. Readings below 30 on the gauge indicate an asset’s value has fallen too fast and is poised to rebound. “The only reason why the euro is being bought is that it looks oversold,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. Ltd. in Tokyo. “It’s just an adjustment of positions by short-term players.” New Zealand’s dollar fell for a fourth day versus its U.S. counterpart as central bank Governor Bollard called for reduced reliance on foreign borrowing and a narrowing of the deficit. “The central bank is trying to endorse a weaker currency and signal that they may not be as much in a rush to raise interest rates,” said Kathy Lien, director of currency research at online currency trader GFT Forex in New York. “Like everyone else in the world, they’re worried about the global financial markets and what growth could be like six months from now.” New Zealand’s currency fell to 68.31 U.S. cents, the weakest since Feb. 9, before trading at 68.68 cents. Australia’s dollar declined to 85.59 U.S. cents from 86.45 cents, after earlier dropping to 85.16 cents, the least since Sept. 7, 2009. Australian consumer confidence fell in May to the weakest since June 2009, according to a Westpac Banking Corp. and Melbourne Institute survey released today in Sydney. To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

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