Euro Falls 3rd Day Versus Yen as Spain Back in Recession

The euro weakened for a third day against the yen after a report showed Spain’s economy entered its second recession since 2009, adding to concern Europe’s debt crisis is worsening.

The 17-nation currency extended its first monthly decline this year versus the dollar as Spain’s government struggled to convince investors it can narrow its budget deficit in an economy that’s grappling with almost 25 percent unemployment. Australia’s dollar slid against most major peers on bets the central bank will cut interest rates. Canada’s dollar tumbled after the nation’s economy unexpectedly shrank.

“Spain seems to be the main concern” for the euro, said Mary Nicola, a currency strategist at BNP Paribas SA in New York. “We have a whole set of euro event risks coming up. Concerns are lingering.”

The euro fell 0.7 percent to 105.67 yen at 5 p.m. New York time, bringing its April loss to 4.4 percent. The shared currency declined 0.1 percent to $1.3239, extending this month’s drop to 0.8 percent. The dollar weakened 0.6 percent to 79.82 yen, falling below 80 yen for the first time since Feb. 24.

The implied volatility of three-month options for the currencies of the Group of Seven nations touched 8.84 percent, the lowest intraday level since November 2007, according to a JPMorgan Chase & Co. index. It closed at 8.99 percent. The 10- year average is 10.6 percent. Lower volatility makes investments in currencies of nations with higher benchmark rates more attractive because the risk in such trades is that market moves will erase profits.

Aussie Rate Bets

Australia’s dollar weakened for the first time in four days against the greenback as economists said the central bank will reduce interest rates at a meeting tomorrow. The overnight cash rate target will be lowered by 0.25 percentage point from 4.25 percent, according to a Bloomberg survey.

The Aussie depreciated 0.4 percent to $1.0429 after rising 0.9 percent last week.

Canadian economic output fell 0.2 percent in February to an annualized C$1.28 trillion ($1.30 trillion) after a January gain of 0.1 percent, Statistics Canada said today in Ottawa. A Bloomberg News survey had projected a 0.2 percent increase.

Canada’s currency weakened 0.7 percent to 98.72 cents per U.S. dollar, after depreciating as much as 0.9 percent in the biggest intraday drop since March 20.

The yen gained the most over the past month among 10 developed-nation currencies, rising 4 percent, according to Bloomberg Correlation-Weighted Indexes. Sweden’s krona was the biggest loser, falling 2 percent. The dollar slipped 0.2 percent, and the euro lost 1.1 percent.

Carry Trade

The carry trade of selling the yen to buy the higher- yielding currencies of Mexico, Australia, South Africa and Norway has lost 38 percent this month. When funded in dollars, the trade is down 10 percent.

Spain’s gross domestic product fell 0.3 percent in the first quarter, the same as in the previous three months, the Madrid-based National Statistics Institute said. From a year ago, GDP slid 0.4 percent, the institute said.

“We know how severe the unemployment situation in Spain is, and it will become increasingly difficult for Spain to fulfill its deficit target and that will be a risk factor for the euro zone and the euro,” said Niels Christensen, chief currency strategist at Nordea Bank AB (NDA) in Copenhagen. “It’s not something that’s going to disappear in the short term.”

Spain will auction three- and five-year notes on May 3 after borrowing costs jumped at a bill sale last week. The European Central Bank meets May 4 to set monetary policy, and France and Greece will hold elections on May 6.

U.S. Economy

The dollar declined against the yen amid speculation the Federal Reserve is ready to add to monetary stimulus if the recovery falters.

The greenback remained lower after the Institute for Supply Management-Chicago Inc. said its business barometer decreased to 56.2 in April from 62.2 a month earlier. It was the least since November 2009. Readings greater than 50 signal growth.

U.S. economic growth slowed to a 2.2 percent annual pace in the first quarter, the Commerce Department said April 27. That lagged behind the 2.5 percent median estimate in a Bloomberg News survey.

The Fed bought $2.3 trillion of bonds in two rounds of so- called quantitative easing from December 2008 to June 2011 to stimulate the economy through lower borrowing costs.

The yen strengthened against all of its 16 most-traded counterparts as the Bank of Japan (8301)’s additional monetary easing last week failed to drive down shorter-term yields, helping maintain the relative allure of yen-denominated assets.

U.K. House Prices

Sterling gained earlier against the dollar as a report showed U.K. house prices increased in April, boosting demand for the British currency. Hometrack Ltd. said home values climbed 0.1 percent from March, when they rose 0.2 percent. The currency also advanced as the Swiss National Bank said it boosted its pound holdings in the first quarter.

The pound appreciated as much as 0.2 percent to $1.6302, the highest level since Aug. 31, before trading at $1.6234, down 0.2 percent. It was little changed at 81.55 pence per euro after touching 81.23 pence, the strongest since June 2010.

The euro may extend this year’s decline against the pound after failing to break above a key level of resistance last week, Commerzbank AG said, citing trading patterns. Resistance is a chart area where sell orders may be clustered.

“Euro-pound continued to ease lower on Friday and starts this week on the defensive,” Karen Jones, head of fixed-income, commodity and currency technical analysis in London, wrote in a note to clients. “Near-term rebounds have remained capped by the previous 82.21 pence January low. While below here, the market remains directly offered.”

The euro is poised to fall to the 2010 low of 80.67 pence over the next one to three months, Jones said.

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

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

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