MW: Euro under $1.26; focus turns to Spain from Greece
By Deborah Levine and Michael Kitchen, MarketWatch
NEW YORK (MarketWatch) — The dollar extended its gain against the euro on Monday, with the shared currency sliding under $1.26 and reversing an initial positive reaction to indications a pro-bailout, pro-euro-zone government will preside in Greece.
Yields on Spanish and Italian debt resumed their march higher, partially reflecting worries European leaders are now under less pressure to roll out new stabilization programs like Europe-wide bank deposit insurance.
The euro EURUSD -0.8031% turned down to $1.2594, after jumping over $1.27 in Asian trade, and compared with $1.2646 in late North American trade Friday.
The dollar index DXY +0.27% , which tracks the greenback against six currencies, rose to 81.884 from 81.584 Friday. The index lost 1.1% last week.
Against the Japanese yen, the euro EURJPY -0.6733% peeled back from a rise to ¥100.80, to fall 1.1% to ¥99.41.
The euro gained as Greece’s pro-bailout New Democracy party garnered the most votes in Sunday’s critical parliamentary elections, increasing the probability that the nation will remain in the euro zone. Read more on Greek election results.
However, U.S. stocks fell, and most European stocks gave up a chunk of earlier gains as yields on Spanish 10-year bonds ES:10YR_ESP +3.50% shot to record highs above 7%. Those for Italy IT:10YR_ITA +1.68% also jumped.
“The Greek election may have returned a best-case scenario for the markets in so far as there may now be a conservative government with a workable majority, but clearly this is no panacea when it comes to either the problems of Greece or those of the rest of EMU,” said Jane Foley, senior currency strategist at Rabobank International.
Foley said the even the New Democracy party may have trouble pushing forward on austerity.
“There may be a path to be forged between appeasing the needs of the Greece people on one hand and maintaining the appearance of austerity and structural reform on the other,” Foley said in emailed comments.
EUROPE IN CRISIS | Topics: Euro
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Data from the Bank of Spain showed a rise in bad loans in April. “The fact that Spanish yields are back above 7% today is mostly the result of uncertainties connected with the combined debts of the Spanish sovereign, the regions and the nation’s banking sector,” said Foley.
Even after a large aid package for Spain’s banking sector was offered last week, markets shrugged it off as not enough to combat the potential spillover effect on the government. Analysts have said Europe will need to come up with a more comprehensive solution, including some form of banking union, possibly pan-European deposit insurance, and farther afield, some form of jointly-secured debt.
“A ‘positive’ election result has eased pressure on the EU authorities to make long-term radical changes to the European Union,” said Kathleen Brooks, research director at Forex.com. “The market is not reducing its pressure on the euro-zone authorities to come up with comprehensive solution to this crisis.”
Analysts will look for any signs of that kind of coordinated policy effort from the Group of 20 meeting that starts in Mexico on Monday. The group may also discuss raising the size of the International Monetary Fund bailout fund.
Against the yen, the dollar USDJPY +0.1269% pared gains to ¥78.92 from ¥78.70.
The British pound GBPUSD -0.2804% also gave up an earlier rally against the dollar, falling 0.4% to $1.5658, after earlier topping the $1.57 level.
Deborah Levine is a MarketWatch reporter, based in New York.
Michael Kitchen is Asia editor for MarketWatch and is based in Los Angeles. Barbara Kollmeyer in Madrid contributed to this report.
