Euro Declines to Lowest in Five Weeks Before Spanish, French Debt Auctions

By Candice Zachariahs - Nov 16, 2011 3:25 PM GMT+0700

The euro sank to five-week lows against the dollar and the yen as Spain and France prepare to sell securities tomorrow after a slump in euro-area debt signaled the region’s debt crisis is spreading.

The 17-nation currency weakened for a third day as the extra yield investors demand to hold bonds from France, Belgium, Spain and Austria instead of German bunds stayed near euro-era records. The dollar rose against 15 of its 16 major peers as investors sought safer assets. China’s yuan failed to extend a gain from yesterday after the People’s Bank of China set its daily reference rate weaker for a second day.

“France, Spain, they’re all seeing yields move out, so you get the impression that we’re at some sort of juncture where banks, investors and corporations are starting to prepare for the worst-case outcome,” said Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney. “The euro will remain under pressure.”

The euro fell 0.3 percent to $1.3493 at 8:20 a.m. London time, after touching $1.3429, the weakest level since Oct. 10. The shared currency declined 0.4 percent to 103.89 yen after weakening to 103.41 yen, also the least since Oct. 10. Japan’s currency gained 0.1 percent to 76.99 versus the dollar.

Spain is scheduled to sell as much as 4 billion euros of bonds due 2022, while France will auction notes maturing from 2013 to 2016 tomorrow. Ten-year Spanish yields jumped 23 basis points to 6.34 percent yesterday, with the extra yield over similar-tenor bunds widening to 455 basis points. It declined two basis points to 6.32 percent today. The spread investors demand to hold 10-year French debt instead of bunds was 191 basis points.

Stop-Losses

The euro extended declines on speculation so-called stop- loss orders around the $1.35 level were activated, according to Satoshi Okagawa, a senior global markets analyst at Sumitomo Mitsui Banking Corp., a unit of Japan’s second largest banking group by market value.

“Stop-losses in euro-dollar were probably triggered,” Singapore-based Okagawa said, referring to automatic orders to buy or sell a currency at a certain level to limit losses. “Selling of the euro looks strong.”

The euro has dropped 1.5 percent over the past six months, according to Bloomberg Correlation-Weighted Indexes. The yen has gained 7.4 percent and the dollar has risen 3.5 percent, the best performers among the 10 developed-nation peers tracked by the gauge.

“When U.S. employment starts to improve among exporters and manufacturers, the dollar is likely to be bought from the second half of next year,” said Masashi Murata, vice president of foreign exchange in Tokyo at BBH Investment Services Inc., a unit of New York-based Brown Brothers Harriman & Co.

BOJ Decision

The number of Americans filing applications for unemployment benefits was 395,000 last week, according to a Bloomberg News survey of economists before the report tomorrow. That compares with a figure of 390,000 for the previous week, the lowest level in seven months.

The yen maintained gains against its major counterparts after the Bank of Japan held its key interest rate near zero and cut its economic assessment for the nation, citing risks from a global slowdown. BOJ Governor Masaaki Shirakawa and his policy board also left an asset-buying fund unchanged at 20 trillion yen in a unanimous decision, the central bank said in a statement released today.

The yen tends to strengthen in periods of financial and economic stress because Japan doesn’t rely on foreign capital to balance current accounts -- the broadest measure of trade. The U.S. dollar benefits because of its status as the world’s primary reserve currency.

Greek Confidence Vote

Losses in the euro were limited before Italian Prime Minister-designate Mario Monti is due to meet with President Giorgio Napolitano to officially accept the post and possibly present his ministers. Greece’s Prime Minister Lucas Papademos faces a roll-call vote today in parliament, which will give him a three-month mandate to implement budget measures and ensure a bailout package.

China’s yuan failed to rally versus the dollar as the central bank’s reference-rate fixing suggests the nation won’t bow to a U.S. call for faster currency appreciation.

“The fixing in the past two days had certain political undertones to it,” said Sacha Tihanyi, a Hong Kong-based currency strategist at Scotia Capital, the investment banking unit of Bank of Nova Scotia. “It may be China sending the message, as has been the case in the past, that overly direct criticism of its currency policy is counter-productive.”

President Barack Obama said “enough is enough” on what the U.S. views as a too-slow appreciation of the yuan at a news conference concluding a summit with Asia-Pacific leaders in Hawaii on Nov. 13.

The PBOC set its daily reference rate at 6.3509 per dollar, the weakest level since Oct. 24. The yuan is allowed to trade up to 0.5 percent on either side of the daily reference rate. The yuan was at 6.3443 per dollar from 6.3465 yesterday, according to the China Foreign Exchange Trade System.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net