By Nia Williams
LONDON, July 28 (Reuters) - The euro fell on Thursday as
high borrowing costs at an Italian debt auction intensified
concerns about the euro zone debt crisis spreading, though
deadlocked U.S. debt ceiling talks limited losses versus the
dollar.
Italy sold 10-year bonds but only at the cost of yields
soaring to their highest in 11 years, while yields in the
secondary market jumped, increasing worries a second Greek
bailout package agreed last week may not prevent contagion to
larger euro zone economies.
The euro dropped to a one-week low of $1.4268 on EBS trading
platform, with traders saying losses accelerated after stop-loss
orders were triggered from $1.4320 down to $1.4280.
It was last down 0.65 percent on the day at $1.4272 .
Traders said bids starting from $1.4250 may help limit losses.
"The market seemed to put the U.S. debt ceiling on the back
burner as attention turned to Greece again, while Italian bond
yield spreads widening was the catalyst for the more aggressive
sell-off from $1.4330/40," said Richard Wiltshire, chief FX
broker at ETX Capital.
"People are on the defensive, reducing euro longs amassed
over the last few days of dollar selling."
The Swiss franc also rose to a record high against the
dollar of 0.7990 francs as investors unnerved by debt
crises on both sides of the Atlantic scrambled for safe haven
assets.
The euro fell 0.5 percent to 1.1454 Swiss francs ,
bringing it closer to a record low of 1.1365 francs hit in
mid-July.
"We are seeing a sell-off in Italian bonds post-auction
which is putting pressure on the euro," said George Saravelos,
G10 FX strategist at Deutsche Bank, who said euro/dollar was
likely to pare losses because of concerns over the U.S. debt
ceiling impasse.
"There is still a lot of uncertainty over how the Greek deal
will be employed, but there are fiscal issues in both Europe and
the U.S. so we think euro/dollar will mostly be moving sideways
for the next few days."
Data showing euro zone economic sentiment worsened more than
expected to 103.2 in July from 105.4 in June, with business
optimism falling in all sectors, also contributed to negative
sentiment towards the shared currency.
DEBT CEILING DEADLOCK
The euro also fell sharply against the safe haven yen,
falling 0.9 percent to 111.00 yen , while the dollar
dropped 0.3 percent to a session low of 77.627 yen on
EBS, near a four-month low of 77.57 yen hit on Wednesday.
That was not far from a record low of 76.25 yen struck in
March, which triggered a co-ordinated intervention in the market
to stem the yen's strength.
The yen has climbed in recent sessions because U.S.
policymakers have so far failed to make progress in agreeing a
deal to raise the nation's debt ceiling before the Aug. 2
deadline, unnerving investors who worry the world's largest
economy could default on its debt.
It rallied further overnight after news reports quoted
Japanese Economics Minister Kaoru Yosano as saying currency
intervention to stem further yen strength would be quite
difficult, and the focus for Japanese policymakers would be the
U.S. deadline next week.
Market players have been speculating that the Bank of Japan
may intervene to curb yen strength but Yosano's comments
suggested there would be no central bank action before Aug. 2,
opening the door to further yen gains.
"Euro and dollar are the two ugly currencies and nobody
really knows what to do with them. So if you want to go
defensive you buy the yen," said David Bloom, global head of FX
research at HSBC.
Analysts said the greenback would enjoy a short-covering
rally if the debt ceiling is raised in time to avert a default,
but such a bounce could prove short-lived, as the U.S. long-term
fiscal structure would remain unsustainable.
(Additional reporting by Jessica Mortimer; Editing by Ruth
Pitchford)
