Euro Weakens as Turmoil Increases Concern Debt Crisis May Spread to Italy

The euro fell for a second day versus the yen and dollar as Italian Prime Minister Silvio Berlusconi faces a budget vote amid pressure to resign, stoking concern the region’s third-largest economy will struggle to manage its debt.

The shared currency pared losses versus the greenback after the European Central Bank’s Juergen Stark said the euro region’s debt crisis will be under control in two years at the latest. Italian government bonds dropped, pushing 10-year note yields to a euro-era high. The franc fell after Swiss National Bank President Philipp Hildebrand said the central bank expects the currency to weaken further.

“Price action for currencies is really tracing its developments coming out of the euro zone on a minute-by-minute basis,” said Ravi Bharadwaj, a market analyst at Travelex Global Business Payments, a currency-exchange network in Washington. “Italian yields are the issue today, and the market is waiting for what will happen with Berlusconi.”

The euro weakened 0.3 percent to 107.53 yen at 5 p.m. New York time. The 17-nation European currency slipped 0.1 percent to $1.3776 after falling earlier to as low as $1.3681 and rising to $1.3838. The dollar lost 0.2 percent to 78.05 yen.

The franc depreciated 1.7 percent to 1.2408 per euro, after touching 1.2418, the weakest level since Oct. 20, amid bets the bank will adjust its cap of 1.20 francs per euro set on Sept. 6. It dropped 1.8 percent to 90.07 centimes versus the dollar.

Stocks Erase Losses

The Standard & Poor’s 500 Index erased losses after Stark, a member of the ECB’s Executive Board, speaking at an event in Lucerne, Switzerland, made his comment on the debt crisis. The equities gauge rose 0.6 percent after falling earlier as much as 1 percent.

“Stark said the crisis would be resolved in one to two years, and it looks as if the equity market took that positively,” said John McCarthy, managing director of currency trading at ING Groep NV in New York. “The euro is following the equity market.”

European finance ministers after a meeting pledged roll out a bulked-up rescue fund next month. Greece was ordered to provide written acceptance of bailout to win an 8 billion-euro ($11 billion) loan installment by the end of November, while Italy was pressed to turn budget-cut promises into reality.

Italian Bonds

Italy’s 10-year bonds yielded 6.66 percent after rising to as high as 6.68 percent, approaching the 7 percent level that drove Greece, Ireland and Portugal to seek rescues. The yield gap between Italian and German securities was 4.88 percentage points, a euro-era record on a closing basis.

“There is political chaos in Italy, and Italian spreads have to reflect the true nature of the political willingness to tackle structural and fiscal imbalances,” said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London. “The wider that the spreads in Italy are, the bigger a cap that puts on the euro.”

Italy, which is due to auction treasury bills this week, sells more than 200 billion euros of bonds a year. Its 1.9 trillion-euro debt amounts to 120 percent of gross domestic product, and is more than the borrowing of Greece, Spain, Portugal and Ireland combined.

Berlusconi is struggling to keep his allies in line after key lawmakers announced defections before parliamentary votes in coming days. He plans to stake the survival of his government in a confidence vote next week on implementation of growth and austerity measures pledged to the European Union.

First Test

The first test comes tomorrow, when a normally routine vote to rubber-stamp last year’s budget report may indicate whether he still has a majority in the 630-seat Chamber of Deputies.

Swiss inflation unexpectedly slowed to a negative rate in October, data today showed. Consumer prices decreased 0.1 percent from a year earlier after rising 0.5 percent in September, the Federal Statistics Office in Neuchatel said.

Unless the franc depreciates, “it could lead to deflationary developments and weigh heavily on the economy,” Hildebrand told NZZ am Sonntag newspaper in an interview conducted Nov. 2 and published yesterday. “We are ready to take further measures in case economic prospects and a deflationary development should require it.”

The franc, sought in times of financial turmoil, appreciated 8.4 percent versus the euro over the past 12 months.

Sterling approached its strongest level in a month against the euro as investors sought an alternative investment to the 17-nation currency.

The pound gained 0.3 percent to 85.80 pence per euro after rising 2 percent last week, the biggest increase since the five days through Jan. 7.

Canada’s dollar gained as crude oil, the nation’s biggest export, surged. The currency strengthened 0.6 percent to C$1.0126 to the greenback. Crude for December delivery climbed 1.5 percent to $95.80 a barrel in New York.

South Africa’s rand weakened for a second day amid concern Europe’s debt crisis is set to worsen. It fell 0.4 percent to 7.9356 per dollar and slipped 0.3 percent to 10.932 per euro.

To contact the reporter on this story: Allison Bennett in New York at abennett23@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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