Euro Nears 11-Month Low Before German PMI

The euro traded 0.4 percent from the weakest level in 11 months against the dollar amid concern Europe’s sovereign-debt crisis will drive up borrowing costs for Spain at a bond auction today.

The 17-nation euro was near the lowest level in 10 weeks against the yen before a report forecast to show Germany’s manufacturing industry contracted for a third-straight month, adding to signs Europe’s fiscal woes are damping growth in the region’s biggest economy. The dollar climbed to two-week highs versus its Australian and New Zealand counterparts as a drop in Asian stocks bolstered demand for the world’s reserve currency.

“We’ve got a very negative view on growth for Europe next year,” said Robert Rennie, Sydney-based chief currency strategist at Westpac Banking Corp., Australia’s second-largest lender. Fiscal austerity and tightening financial conditions “will develop into a fully blown recession,” he said.

The euro traded at $1.2993 as of 6:51 a.m. in London from $1.2983 in New York yesterday, when it dipped below $1.30 for the first time since January and touched $1.2946, the lowest since Jan. 11. The shared currency fetched 101.42 yen from 101.36, after dropping as low as 101.10 yesterday, the weakest since Oct. 4. The dollar was little changed at 78.06 yen.

The greenback gained 0.3 percent to 98.83 U.S. cents per Australian dollar and touched 98.62, the most since Nov. 28. It rose 0.4 percent to 74.73 U.S. cents against New Zealand’s dollar, after earlier reaching 74.62, the strongest since Nov. 28.

Stock Losses

The MSCI (MXAP) Asia Pacific Index of shares fell 1.9 percent as a survey indicated China’s manufacturing may contract for a second month in December.

Spain aims to sell as much as 3.5 billion euros ($4.5 billion) of debt maturing in 2016, 2020 and 2021 today. Italy yesterday had to pay the most in 14 years to sell five-year notes as its Parliament rushes to pass a 30 billion-euro budget plan that Prime Minister Mario Monti says will bring down borrowing costs.

European Central Bank policy makers are becoming more skeptical about the efficacy of the bank’s bond-purchase program, Bundesbank President Jens Weidmann said at an event in Frankfurt on Dec. 13.

“I am not a fan of the SMP,” said Weidmann, who is also a member of the ECB’s governing council, referring to the central bank’s Securities Markets Program. “The fans of the SMP are becoming increasingly skeptical.”

ECB Bond Purchases

With Italy and Spain needing to sell a combined 20 billion euros of debt in January, according to Citigroup Inc., the ECB has come under pressure to step up bond purchases to contain the crisis while politicians seek a longer-term solution.

ECB policy makers including President Mario Draghi have emphasized the bond buying is “limited” and can’t return confidence to the market in the absence of government reforms. Draghi is scheduled to speak in Berlin today.

A purchasing managers index for German manufacturing probably slid to 47.5 in December, according to the median estimate of economists in a Bloomberg News survey before today’s report from London-based Markit Economics. That would be the weakest reading since July 2009 and would indicate a third- consecutive month of contraction.

“The situation in Europe is a worry on the financial side as well as the economic side,” said Derek Mumford, a Sydney- based director at Rochford Capital, a currency-risk management firm. “The U.S. dollar is still the currency to go to as far as a safe haven.”

Relative Strength Index

The dollar has appreciated 3.2 percent in the past month, the best performance among 10 currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro has fallen 1.4 percent and the yen has advanced 1.7 percent.

The euro halted three days of losses as a technical indicator signaled its recent decline was overdone.

The currency’s 14-day relative strength index against the greenback was 29, below the 30-level that some traders see as a sign that an asset may be about to reverse direction. The RSI for the euro-yen rate was at 30.

Sentiment among Japan’s largest manufacturers deteriorated more than economists had expected, a quarterly central bank survey showed. The Tankan large manufacturer index fell to minus 4 from 2, the Bank of Japan said today in Tokyo. The median estimate of economists surveyed by Bloomberg was for a reading of minus 2.

The manufacturers forecast that the yen will average 79.02 per dollar in the year through March 2012, compared with 81.15 in the previous poll.

U.S. Economy

Demand for the dollar was supported amid signs that the world’s largest economy is recovering, reducing the need for further easing measures from the Federal Reserve.

Industrial production increased 0.1 percent last month, following a 0.7 percent gain in October, a poll of economists showed before today’s data. Gauges of manufacturing from the Fed Banks of Philadelphia and New York may also point to expansion in those regions.

“This improved data momentum really has been a key driver behind the improved tone for the U.S. dollar,” said Westpac’s Rennie.

The Fed’s policy-setting panel said Dec. 13 the economy “has been expanding moderately,” compared with the Nov. 2 assessment that growth “strengthened somewhat.”

-- With assistance from Mariko Ishikawa in Tokyo. Editors: Rocky Swift, Jonathan Annells

To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net

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

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