BLBG:Euro Weakens as Spanish, Italian Yields Rise on Political
The euro fell the most in two weeks against the dollar as Italian and Spanish bonds slumped amid political turmoil in the euro-area’s third- and fourth-largest economies, damping demand for the shared currency.
The 17-nation euro dropped versus all except one of its 16 major peers as Spanish Prime Minister Mariano Rajoy faced calls to resign after newspaper reports alleged he accepted illegal cash payments. A poll showed former Italy’s premier Silvio Berlusconi closed the gap on front-runner Pier Luigi Bersani even as he appeals a four-year prison sentence for tax fraud. The yen weakened beyond 93 per dollar for the first time since May 2010. European Central Bank policy makers meet this week.
“It doesn’t help that the political background is a little bit more uncertain,” said Adam Cole, head of global currency strategy at Royal Bank of Canada in London. The ECB meeting will “be a negative background for the currency this week.”
The euro declined 0.6 percent to $1.3564 at 7:14 a.m. in New York, the biggest decline since Jan. 18. The common currency slipped 0.5 percent to 126.01 yen. The yen dropped 0.1 percent to 92.90 per dollar after sliding to 93.18, the weakest level since May 13, 2010.
The euro will depreciate to $1.30 by year-end, RBC’s Cole said. His prediction matches the median of 60 estimates compiled by Bloomberg. Implied volatility from options trading shows the chance of it ending the year below that level is 28 percent.
Spanish Bonds
Spain’s 10-year bond yield climbed as much as 22 basis points, or 0.22 percentage point, to 5.42 percent, the highest since Dec. 18. Rajoy, who says the allegations published in Spain’s biggest newspaper El Pais are unfounded, travels to Berlin today to meet German Chancellor Angela Merkel.
Italian 10-year yields jumped seven basis points to 4.40 percent. The additional yield investors demand to hold the securities instead of German bunds increased for a fourth day after Prime Minister Mario Monti said the spread may widen if Berlusconi is elected this month.
Barclays Plc raised its forecasts for the euro against the dollar to take into account gains that pushed the shared currency to the strongest level since November 2011 last week. The euro will drop to $1.32 in six months and $1.28 in a year, higher than from previous estimates of $1.26 and $1.22, strategists Raghav Subbarao and Guillermo Felices in London wrote today in a note to clients.
Yen Weakens
The yen fell against the dollar, extending a record 12 straight weeks of declines, as Prime Minister Shinzo Abe’s administration presses the central bank to ease monetary policy further to beat deflation.
Finance Minister Taro Aso said yesterday the government is imitating his Depression-era predecessor, Korekiyo Takahashi, who told the Bank of Japan (8301) to underwrite government debt to fund deficit spending.
“The yen weakness story remains on expectations that the BOJ will keep its accommodative stance,” said Daisaku Ueno, a senior foreign-exchange and fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo.
The yen tumbled 16 percent over the past three months, the biggest decline among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 4.8 percent and the dollar dropped 1.6 percent.
The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S trading partners, gained 0.5 percent today to 79.492.
South Korea’s won rose the most in 14 months against the dollar after U.S. and Chinese reports added to signs of recovery in the world’s largest economies and comments from a Bank of Korea official eased intervention concern.
The currency climbed from a three-month low after official reports showed U.S. employers added workers last month and China’s services industry grew at the fastest pace since August. Bank of Korea board member Moon Woo Sik said it’s too early for any central bank response to the yen’s slide against the won.
The won appreciated 1.2 percent to 1,084.78 per dollar at the close of trading in Seoul, the biggest advance since December 2011.
To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
