BLBG:Euro Approaches Two-Year Low On Spanish Banks Concern
The euro fell to the lowest in almost two years against the dollar as Spain struggled to rescue its troubled banks, adding to signs the European debt crisis is spreading to the region’s larger economies.
The 17-nation currency slid for a seventh day versus the yen, the longest losing streak in four months, after Italy sold less than its maximum target at a debt auction. The yen and dollar strengthened as investors sought safer assets after a European report showed economic confidence dropped more than economists estimated in May. Asian currencies weakened, pushing the Bloomberg-JPMorgan Asia Dollar Index toward its worst monthly loss since September.
“Questions about how much does Spain need, who will fund it and also in the meantime can they stop a bank run in Spain, are enormous political hurdles,” said Jane Foley, a senior currency strategist at Rabobank International in London. “These will be questions that either make or break the euro zone.”
The euro declined 0.4 percent to $1.2448 at 10:52 a.m. London time after sliding to $1.2434, the weakest since July 2010. The single currency fell 0.9 percent to 98.49 yen. It dropped to 98.27 yen, the lowest level since Jan. 18. The yen gained 0.5 percent to 79.11 per dollar.
The European currency has depreciated 6 percent against the dollar this month, the most since September, and slid 6.8 percent versus the yen.
“The euro could go lower, maybe it can go down towards $1.20,” Foley said. “The question is will the downside risks turn into a downward spiral.”
Bankia Recapitalization
Spanish bond yields climbed after central bank Governor Miguel Angel Fernandez Ordonez resigned a month early amid criticism over the nationalization of Bankia group, the nation’s third-largest lender.
The euro dropped for a second day against the greenback as Spain backtracked on a plan to use government debt instead of cash to bail out the group, while Prime Minister Mariano Rajoy struggles to shore up the nation’s lenders without overburdening public finances.
An Economy Ministry spokesman said on May 28 the government was considering an injection of treasury debt instead of cash to recapitalize Bankia, as laid out in legislation approved in February. Investors criticized the idea, which the spokesman, speaking anonymously under ministry policy, said yesterday had become a “marginal” option for the 19 billion-euro rescue.
Focus on Spain
Spain’s 10-year bond yield rose as high as 6.65 percent, the most since Nov. 28, approaching the 7 percent level that led to bailouts in Greece, Ireland and Portugal.
The market is “focusing a little bit more on Spain than the Greek elections at the moment and of course the Spanish bank problems,” David Forrester, senior vice president for Group- of-10 foreign-exchange strategy in Singapore at Macquarie Bank Ltd., said in an interview with Bloomberg Television. The euro may extend losses toward $1.20, he said.
The euro has declined 4.3 percent in the past six months, the biggest loser among the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar climbed 4.3 percent, the best performer, while the yen appreciated 2.1 percent.
In Greece, most people want to see the terms of an international financial rescue revised even as they acknowledge that not abiding by austerity measures required for the funds may lead to the country leaving the euro, according to an opinion poll before a second general election due June 17.
Euro-Area Sentiment
Italy sold 5.73 billion euros of bonds as borrowing costs rose from the previous sale in April. The Treasury auctioned 10- year debt at a rate of 6.03 percent, the highest since Jan. 30 and up from 5.84 percent. Investors bid for 1.4 times the amount offered, down from 1.48 last month. Also, five-year notes valued at 3.4 billion euros were bought to yield 5.66 percent, compared with 4.86 percent last month.
An index of executive and consumer sentiment in the euro area fell to 90.6 from a revised 92.9 in April, the European Commission in Brussels said today. That’s the lowest since October 2009 and below the 91.9 forecast by economists, according to the median of 28 estimates in a Bloomberg News survey.
The Asia Dollar Index has lost 2.6 percent this month as global funds pulled $7.7 billion from South Korean, Taiwanese and Indonesian stocks, according to exchange data.
‘Fragile’ Sentiment
“Sentiment toward emerging-market assets remains fragile on concern over the Spanish banking sector,” said Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong. “We expect a risk-off environment, with currencies on the defensive and lower rates.”
The Australian dollar fell for a second day after a government report showed retail sales unexpectedly dropped in April for the first time in 10 months.
Sales declined 0.2 percent from March, when they rose a revised 1.1 percent, the Bureau of Statistics said in Sydney. The median forecast of economists in a Bloomberg News survey was for a 0.2 percent increase.
Australia’s dollar dropped 0.9 percent to 97.64 U.S. cents. it weakened to 96.90 cents on May 23, the lowest since Nov. 25.
To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
