The euro fell from almost a one-week high against the dollar after a European report showed inflation slowed, backing the case for the region’s central bank to cut interest rates. The 17-nation currency dropped toward an 11-year low against the yen after demand at a German auction of 10-year bonds was lower than the average over the past five years. The currency also slid after El Pais newspaper reported the Spanish government helped the Valencia region make an overdue payment to Deutsche Bank AG. Hungary’s forint weakened to a record on concern talks between the government and the European Union over financial aid will be delayed. “The German auction wasn’t stellar, and you can trace the weaker euro to concerns in Spain that are starting to bubble to the surface again,� said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “There’s definitely a somewhat more defensive tone to the market today.� The euro fell 0.9 percent to $1.2937 at 8:59 a.m. in New York after rising to $1.3077 yesterday, the highest level since Dec. 28. The common currency slipped 0.8 percent to 99.31 yen. It dropped to 98.66 yen on Jan. 2, the weakest since December 2000. The dollar was little changed at 76.77 yen. European inflation (ECCPEST) slowed to 2.8 percent for December from a three-year high of 3 percent the prior month, the European Union statistics office said. A separate report from Markit Economics showed a euro-area composite index (ECPMICOU) based on a survey of purchasing managers in services and manufacturing stayed below the 50 level that delineates contraction and expansion for a fourth month. Year-End Outlook The euro may depreciate to $1.20 by year-end as the European Central Bank cuts interest rates, according to Paul Robinson, global head of foreign-exchange research at Barclays Plc in London. The ECB may lower its refinancing rate to 0.5 percent this quarter, Robinson said in an interview on Bloomberg Television’s “The Pulse� with Maryam Nemazee. Germany sold 4.06 billion euros ($5.3 billion) of 2 percent bonds due in January 2022 at an average yield of 1.93 percent. Investors bid for 1.27 times the amount allotted. That compares with a bid-to-cover ratio of 1.07 at a previous auction of the debt on Nov. 23, and the five-year average of 1.6. Spain’s Treasury gave a verbal guarantee to an unidentified lender persuading it to advance the funds the Valencia government needed to make a 123 million-euro payment, El Pais newspaper said, citing people it didn’t identify at the national economy ministry and the regional economy department. Speculation on Spain The euro also weakened amid speculation Spanish Prime Minister Mariano Rajoy’s government is considering applying for loans from the European Union’s rescue fund and the International Monetary Fund, Expansion reported, citing unidentified people with knowledge of the matter. The country’s deputy minister for communication, Carmen Martinez Castro, said in a telephone interview that there are no plans to seek external aid. The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the U.S. currency against those of six major trading partners, gained 0.5 percent to 80.092. Demand for the dollar was tempered before U.S. reports that economists said will show factory orders increased and services industries expanded, damping demand for safer assets. Bookings for U.S. factory goods (TMNOCHNG) climbed 2 percent in November after dropping 0.4 percent the previous month, according to a Bloomberg News survey before today’s Commerce Department report. Service industries (NAPMNMI) grew in December at the fastest pace in three months, a separate Bloomberg survey showed before data tomorrow from the Institute for Supply Management. ‘Weaker U.S. Dollar’ “We are in a situation where stronger U.S. data does lead to risk appetite elsewhere and definitely to a weaker U.S. dollar,� said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “The global economy is a lot better than people were expecting.� The dollar has fallen 1 percent in the past week, the worst-performer among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The greenback gained 1.1 percent last year, snapping two years of declines. The forint dropped for a second day against the euro on concern a resumption in talks with the International Monetary Fund and the EU on financial assistance will be delayed. Hungary, the EU’s most-indebted eastern member, received its second sovereign-credit downgrade to junk last month when Standard & Poor’s followed Moody’s Investors Service in taking the country out of its investment-grade category on Dec. 21. “There is an increased likelihood that the IMF deal will not happen before the second half of 2012,� Eszter Gargyan, a Budapest-based economist at Citigroup Inc., wrote in a research report today. A delay in the IMF talks may necessitate rate increases of as much as 300 basis points, or 3 percentage points, from the current 7 percent rate to defend the forint, Gargyan said. The forint dropped 1 percent to 319.60 per euro after falling to a record 320.33. To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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