Euro Approaches Four-Month Low as Spain’s Costs Rise
Thursday, 17 May 2012 | 14:30
The euro was within one cent of a four-month low after Spain’s borrowing costs rose at an auction amid concern that contagion from Greece is spreading across the region as the sovereign debt crisis intensifies.
Europe’s shared currency was 0.3 percent from the weakest in three months versus the yen after European Central Bank President Mario Draghi signaled it won’t compromise on keeping Greece in the euro area. The Dollar Index held its longest string of gains since its inception in 1973 before reports forecast to show manufacturing in the Philadelphia region expanded in May and initial jobless claims fell last week. The Australian dollar strengthened, trimming a four-day decline.
“Euro negativity is multidimensional,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “Even though Spain’s auction was reasonable, we will probably see peripheral spreads continuing to widen and the euro continuing to suffer as markets try and make assumptions about where we will go from here, particularly in Greece and Spain.”
The euro was little changed at $1.2711 at 11:06 a.m. London time, after dropping to $1.2681 yesterday, the weakest level since Jan. 17. The shared currency was also little changed at 102.13 yen, after sliding to 101.91 yesterday, the lowest since Feb. 14. The yen was at 80.35 per dollar.
The Australian dollar rose 0.2 percent to 99.37 U.S. cents and the Stoxx Europe 600 Index dropped 0.4 percent.
Spain sold bonds due January 2015 at an average yield of 4.375 percent, compared with 2.89 percent when they were auctioned in April. Investors bought bonds maturing in July 2015 at 4.876 percent, compared with 4.037 percent on May 3 and bonds due April 2016 at 5.106 percent.
Borrowing costs in Europe’s most-indebted nations are rising amid speculation that Greece will leave the 17-nation euro area after inconclusive national elections on May 6.
Draghi acknowledged for the first time yesterday that Greece may exit. While the bank’s “strong preference” is that Greece stays in the bloc, the ECB will continue to preserve “the integrity of our balance sheet,” he said in a speech in Frankfurt.
“The market is still mainly driven by developments in Europe -- we are going to be in a prolonged period of heightened uncertainty” and euro weakness, said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Investors are fearful that Europe’s firewalls aren’t enough to protect against contagion. We still favor the more defensive currencies like the yen and the dollar.”
The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, was little changed at 81.44.
The index may be set for a “corrective snap back,” MacNeil Curry, head of foreign exchange and interest rates technical strategy at Bank of America in New York, wrote in a report yesterday. “However, against 80.38 trendline support, the larger bull trend remains” and the gauge may see resistance in the 82.59 to 83.36 area, he wrote.
Resistance refers to an area on a price graph where sell orders may be clustered, while support is a level where there may be an accumulation of orders to buy.
The Federal Reserve Bank of Philadelphia’s general economic index increased to 10 in May from 8.5 the previous month, economists forecast before today’s report. First-time jobless claims dropped to 365,000 in the week ended May 12, a separate report is forecast to show.
Several Fed policy makers said a loss of momentum in growth or increased risks to their economic outlook may warrant additional action to keep the recovery on track, according to minutes of the FOMC’s April 24-25 meeting released yesterday in Washington. Central bankers last month affirmed their plan to hold interest rates near zero at least through late 2014 as they sought to push down an unemployment rate that has stayed above 8 percent for more than three years.
“There’s a sign from the FOMC that they can see the possibility of more policy combination if certain conditions are met,” said Joseph Capurso, a Sydney-based strategist at Commonwealth Bank of Australia. (CBA) “That means the U.S. dollar may start to stabilize rather than continue to rocket higher. It’s going to give people a bit more of a reason to pause before they pile into U.S. dollars.”
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