Euro Falls to Four-Month Low as Spain’s Debt Costs Rise

The euro fell to a four-month low as Spain’s borrowing costs rose at an auction, stoking concern that the region’s financial contagion is spreading from Greece.
Europe’s shared currency declined to the weakest in three months versus the yen. The European Central Bank said it will temporarily stop lending to some Greek banks as President Mario Draghi signaled it won’t compromise to keeping Greece in the euro area. The Dollar Index extended its longest string of gains since its inception in 1973 as a report showed U.S. jobless claims for unemployment benefits were unchanged last week before another report forecast to show manufacturing in the Philadelphia region expanded in May.

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Pedestrians pass in front of the European Central Bank's (ECB) headquarters in Frankfurt, Germany. The ECB said in an e-mailed statement yesterday that it will temporarily stop lending to some Greek banks to limit its risk. Photographer: Hannelore Foerster/Bloomberg

 

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May 17 (Bloomberg) -- Geoff Kendrick, head of European currency strategy at Nomura International Plc, talks about the prospect of a Greek exit from the euro and the impact on his foreign-exchange strategy. He speaks with Guy Johnson on Bloomberg Television's "The Pulse." (Source: Bloomberg)

“European tensions are showing few signs of subsiding,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “We’re going to watch the Greek polls over the next couple of weeks. What is worrisome is that the left-wing, anti-European Union party appears to be leading some of the latest polls.”
The euro fell 0.1 percent to $1.2702 at 8:54 a.m. New York time after touching 1.2667, the weakest level since Jan. 17. The shared currency declined 0.3 percent to 101.85 yen. It earlier fell to 101.60 yen, the lowest since Feb. 7. The yen was 0.1 percent stronger at 80.24 per dollar.
Spain’s 10-year yield difference, or spread, over benchmark German bunds widened 10 basis points to 493 basis points and the Stoxx Europe 600 Index (SXXP) dropped 1.1 percent.

Spanish Sale

Spain sold bonds due in January 2015 at an average yield of 4.375 percent, compared with 2.89 percent when they were last 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 as political parties opposed to the terms of two international bailouts polled strongly in inconclusive May 6 elections. A fresh vote has been set for June 17.
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 will continue to preserve “the integrity of our balance ECB sheet,” he said in a speech.
“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.”

Corrective Snap

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, advanced for a 14th consecutive day, rising 0.2 percent to 81.55.
Jobless claims were unchanged at 370,000 in the week ended May 12, Labor Department figures showed today in Washington. The median forecast of 48 economists surveyed by Bloomberg News called for a drop in claims to 365,000. 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.

Additional Action

Several Fed policy makers said a loss of momentum in growth may warrant more stimulus to keep the recovery on track, according to minutes of the Federal Open Market Committee’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.
The Dollar Index (DXY) 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 trend-line 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.