Euro Reaches Five-Week Low on Speculation ECB Will Buy More European Debt

The euro touched a five-week low versus the yen and dollar amid bets the European Central Bank will have to buy more European government debt as confidence wanes in the region’s ability to deal with its debt crisis.

The 17-nation currency dropped below $1.35 for a second day as Fitch Ratings said U.S. banks face a “serious risk” to their creditworthiness if the European crisis worsens. Spain will auction up to 4 billion euros ($5.4 billion) of bonds tomorrow, the same day France will sell as much as 8.2 billion euros of debt. The Australian dollar and Swedish krona were the biggest losers versus the dollar as investors sought safety.

“It’s a highly biased market, with people anticipating a lower euro and further weakness in risk assets overall,” said Brian Dolan, chief strategist at FOREX.com, a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey. “It’s a death watch for Italy and the euro. Auctions are the next hurdle, and I suspect they will come in with weak results, which would be another negative reinforcement in weakness in euro-zone sovereign credit.”

The euro slid 0.5 percent to 103.75 yen at 5 p.m. New York time. It dropped 0.9 percent earlier to touch 103.41 yen, the weakest level since Oct. 10. The shared currency fell 0.6 percent to $1.3463, after tumbling earlier to as low as $1.3429, also the least since Oct. 10. Japan’s currency traded at 77.06 versus the dollar, compared with 77.03 yesterday.

‘Further Contagion’

The shared currency extended losses and U.S. stocks fell as Fitch said U.S. banks have manageable direct exposure to stressed European markets in Greece, Ireland, Italy, Portugal and Spain, “but further contagion poses a serious risk.”

“Fitch believes that unless the euro-zone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen,” the New York-based rating company said today in a statement.

The euro’s decline will find support levels, or areas on a chart where buy orders may be clustered, at $1.3404 and $1.3382, according to MacNeil Curry, head of foreign-exchange and interest-rates technical strategy at Bank America Corp. in New York. A break above $1.3557 is needed to indicate stabilization, Curry wrote to clients today.

The shared currency slid 1.7 percent over the past six months versus nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The yen gained 9 percent and the dollar rose 4.2 percent, the best performers.

The ECB purchased larger-than-usual sizes and quantities of Italian debt today, said two people with knowledge of the trades, who declined to be identified because the deals are private. An ECB spokesman in Frankfurt declined to comment.

‘Mass Buying of Bonds’

“If the ECB is coming in to buy bonds, it shows how much stress and negative pressure there is, and that will be on the euro as well,” said David Mann, New York-based regional head of research for the Americas at Standard Chartered Plc. “Some in the markets are suspecting that there has been an informal agreement for the ECB to literally start money-printing. If that’s the case, you’ll see ECB mass buying of bonds.”

French 10-year bonds yielded as much as 3.74 percent, the most since April. The yields were 1.9 percentage points above those on comparable German bunds, the most since at least 1992.

Spanish 10-year yields reached 6.42 percent. They touched 6.46 percent on Aug. 2, the highest since 1997. Investors demanded a premium of 4.6 percentage points, the highest since before the euro debuted in 1999, to buy them instead of bunds.

‘Broadening of Contagion’

“There is very much the story of the broadening of contagion to the core, so we’re seeing almost all countries at record-wide spreads to Germany within the core,” said Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York. “We’re still in a market where any kind of longer-term player is much more comfortable selling on the euro upside than buying the downside.”

Spain will auction bonds tomorrow due in 2022. France is set to sell up to 7 billion euros of notes and 1.2 billion euros of inflation-linked debt.

The cost for European banks to fund in dollars rose to a three-year high. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was much as 1.23 percentage points below the euro interbank offered rate, data compiled by Bloomberg show. It reached 1.26 percentage points, the most expensive funding level based on closing prices since December 2008.

IntercontinentalExchange Inc.’s Dollar Index, which it uses to track the greenback against the currencies of six major U.S. trading partners, rose 0.5 percent to 78.319.

Fed Help

The euro briefly erased losses versus the yen and dollar after Boston President Eric Rosengren said a deterioration of Europe’s debt crisis might warrant “coordinated activities” between the Fed and the ECB. He said after a speech in Boston he doesn’t foresee such an outcome. The Standard & Poor’s 500 Index pared losses before tumbling 1.7 percent.

Sterling depreciated versus the dollar as Bank of England Governor Mervyn King said growth may be “broadly flat” in the first half of 2012. He spoke at a press conference after the quarterly Inflation Report.

The pound weakened 0.6 percent to $1.5732 after falling to as low as $1.5722, the least since Oct. 20. It was little changed at 85.58 pence per euro.

Australia’s dollar depreciated 0.9 percent to $1.0082 as investors sought safer assets, and Sweden’s krona slid 1.1 percent to 6.8131 per dollar.

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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