Euro Falls to Two-Month Low on European Debt Crisis Concerns; Aussie Drops

The euro fell to a two-month low against the dollar amid concerns Europe’s sovereign-debt burdens are worsening as its economic recovery slows, diminishing the appeal of the region’s assets.

The common currency headed for a weekly decline versus 14 of its 16 major peers after the Financial Times Deutschland reported that euro-area policy makers are pushing Portugal to seek assistance from a 750 billion-euro ($1 trillion) bailout fund. The dollar rose to a seven-week high versus the yen as concern the conflict between North and South Korea will escalate boosted demand for the safety of the greenback.

“This government debt crisis in Europe has further to run,” said Joseph Capurso, a currency strategist at Commonwealth Bank of Australia in Sydney. “Portugal and Spain have shaky government finances, so their bond markets might go through a period of selloff. In that sort of environment, you would expect the euro to sell down further.”

The euro declined to $1.3281 as of 7:03 a.m. in London from $1.3360 in New York yesterday, after earlier reaching $1.3265, the lowest since Sept. 22. The single currency has fallen 2.9 percent this week. It sank to 111.47 yen from 111.69 yen.

The dollar advanced to 83.93 yen from 83.60 yen, after earlier touching 83.96 yen, the strongest since Oct. 5. The U.S. currency reached $1.5698 per pound, the strongest since Oct. 26. The dollar rose to as high as 1.0031 francs, the strongest since Sept. 21, before trading at 1.0016 from 1.0006.

Pressure on Portugal

By putting pressure on the Portuguese government, the European Central Bank and countries in the currency union aim to prevent a bailout of Spain, Financial Times Deutschland said. The newspaper sent an e-mail preview of a report to be published in today’s edition that cites unidentified people within Germany’s finance ministry. Portugal faces a final vote in parliament today on its 2011 spending plan, which includes measures to pare its deficit.

Borrowing costs for the euro region’s most-indebted nations are surging as Ireland’s capitulation in accepting a bailout of its banking industry stokes speculation that other countries also will have to seek aid. The average yield investors demand to hold 10-year debt from Greece, Ireland, Portugal, Spain and Italy reached 7.52 percent yesterday, a euro-era record.

Irish Finance Minister Brian Lenihan said yesterday that while the size of a bailout from the European Union and the International Monetary Fund hasn’t yet been determined, an amount of around 85 billion euros “has been mentioned.” The government said this week it will cut spending by about 20 percent and raise taxes over the next four years.

‘Tentative’ Recovery

“The Irish budget and bailout have not calmed market nerves, and the market has now turned its attention to Portugal,” said David Forrester, a currency economist at Barclays Capital in Singapore. Gains in euro-area bond yields relative to German bunds put “downward pressure on the euro.”

The extra yield investors demand to hold Irish 10-year bonds instead of their German counterparts rose to 6.32 percentage points, while the spread of Portugal’s 10-year debt over German bunds climbed to 4.31 points yesterday.

France’s consumer spending fell 0.5 percent in October from September, when it rose 1.5 percent, according to a Bloomberg News survey of economists before today’s report. Europe’s recovery will remain “tentative” for the next two years, with a risk of a setback if the region’s debt crisis isn’t resolved, a group of European research institutes said today.

The euro has fallen 2.6 percent over the past month in a measure of 10 developed-nation counterparts, Bloomberg Correlation-Weighted Currency Indexes show. The dollar is up 2.1 percent, while the yen has dropped 1.2 percent.

The Dollar Index, which tracks the greenback against currencies of six major U.S. trading partners, advanced to as high as 80.153, the strongest since Sept. 24.

U.S. Carrier

The dollar gained for a third day versus the yen as North Korea’s state-run Korean Central News Agency said planned naval exercises by South Korea and the U.S. moved the peninsula “closer to the brink of war.”

President Barack Obama has dispatched the USS George Washington to take part in military drills, scheduled for Nov. 28 to Dec. 1 in the Yellow Sea off the western coast of the Korean peninsula. The U.S. sent the aircraft carrier in a show of strength after North Korea this week shelled a South Korean island. North Korea warned that any “escalated confrontation” will lead to war, KCNA said in an e-mailed statement.

“There seem to be ongoing tensions between the Koreas, and Japan is geographically close to them,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd. “This may be causing some buying of the dollar and selling of the yen.”

South Korea’s won dropped 1.9 percent to 1,159.63 per dollar, the sharpest daily drop since June 25.

Australia’s dollar weakened for a second day after Reserve Bank Governor Glenn Stevens said his country’s interest rate setting is appropriate, damping prospects for early increases.

Stevens’ statement suggests the “RBA is pretty comfortable with the current level of policy and will hardly change it,” said Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney. “The market hasn’t got another hike fully priced in until July next year.”

The Australian dollar slid 1.2 percent to 96.95 U.S. cents, and slid 0.8 percent to 81.36 yen.

To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net

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

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