The euro fell to a four-month low as Spain’s borrowing costs rose at an auction, stoking concern that the region’s financial contagion is spreading from Greece.
Europe’s shared currency remained lower against most of its major counterparts after Fitch Ratings downgraded Greece’s long-term credit rating to CCC from B-, citing heightened risk that the nation may not be able to sustain membership in the monetary union. The yen extended its gain against the dollar after data showed U.S. jobless claims for unemployment benefits were unchanged last week and another report showed Philadelphia-area manufacturing decreased in May.
“There’s a lot of uncertainty about where Europe is headed on the political front, and markets are trading the uncertainty, which means that risky asset prices will fall,” said Aroop Chatterjee, a currency strategist at Barclays Plc’s Barclays Capital unit in New York. “There are some headwinds for dollar-yen, given that the U.S. economy has been giving mixed signals.”
The euro fell 0.1 percent to $1.2698 at 5 p.m. New York time after touching $1.2667, the weakest level since Jan. 17. The shared currency declined 1.4 percent to 100.68 yen. It earlier fell to 100.56 yen, the lowest since Feb. 7. The yen strengthened 1.3 percent to 79.28 per dollar after reaching 79.14, the strongest since Feb. 17.
Spain sold bonds due in January 2015 at an average yield of 4.375 percent, compared with 2.89 percent when they were last auctioned in April. Investors bought bonds maturing in July 2015 at 4.876 percent, compared with 4.037 percent on May 3 and bonds due April 2016 at 5.106 percent.
The cost of insuring against a Spanish default rose to a record, with credit-default swaps on the nation’s bonds jumping 13 basis points to a record 553, according to data compiled by Bloomberg.
Moody’s Investors Service downgraded the credit ratings of 16 Spanish banks, including Banco Santander SA (SAN), citing economic weakness and the government’s mounting budget strain. The reductions followed Moody’s May 14 downgrade of 26 Italian banks and its Feb. 13 cut of Spain’s sovereign debt.
Borrowing costs in Europe’s most-indebted nations are rising amid speculation that Greece will leave the 17-nation euro area as political parties opposed to the terms of two international bailouts polled strongly. A fresh vote has been set for June 17.
The European Central Bank said it will temporarily stop lending to some Greek banks with President Mario Draghi indicating it won’t compromise to keep Greece in the euro area. Draghi acknowledged for the first time yesterday that Greece may exit. While the bank’s “strong preference” is that Greece stays in the bloc, the will continue to preserve “the integrity of our balance ECB sheet,” he said in a speech.
The euro’s fluctuations against the dollar come as built-up short positions in the futures market prevent it from accelerating its downward trend, said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. A short is a bet the price of an asset will fall.
“The short-term speculative positioning is already heavily short the euro, and while it’s not going to change the trend, it just might slow it,” Serebriakov said. “We’re seeing losses in the euro but they’re relatively gradual.”
Hedge funds and other large speculators increased their bets on a weaker euro to 143,984 in the week ended May 8, according to Commodity Futures Trading Commission data. The euro short positions reached a record high of 171,347 contracts in January.
While the euro has dropped 4.1 percent this month against the dollar, it may be poised to consolidate in the near term if the ECB continues to provide Emergency Liquidity Assistance funding for Greek banks, Jens Nordvig, a managing director of currency research in New York at Nomura Holdings Inc., wrote in a note to clients.
“We are now booking profits on euro-dollar shorts in spot form,” Nordvig wrote. “However, we still view the risk skewed significantly to the downside over the next two months.”
If the Greek election outcome spurs the nation to begin exiting the monetary union, the euro could test the $1.20 area, Nordvig said.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, advanced for a 14th consecutive day, rising 0.2 percent to 81.5, in the longest streak of gains since its inception in 1973.
Jobless claims were unchanged at 370,000 in the week ended May 12, Labor Department figures showed today in Washington. The median forecast of 48 economists surveyed by Bloomberg News called for a drop in claims to 365,000.
The Federal Reserve Bank of Philadelphia’s general economic index decreased to minus 5.8 in May from 8.5. Economists forecast the gauge would rise to 10, according to the median estimate in a Bloomberg News survey. Readings greater than zero signal expansion in the area covering eastern Pennsylvania, southern New Jersey and Delaware.
Higher-yielding currencies, including Canada’s dollar and Mexico’s peso, fell against the dollar after the weaker-than-expected data diminished investor appetite for risk. The U.S. is Canada’s and Mexico’s largest trade partner.
The loonie, as Canada’s dollar is known, fell 0.7 percent to C$1.0196 against the greenback and the peso lost 0.5 percent to 13.8393 per dollar.
Several Fed policy makers said a loss of momentum in growth may warrant more stimulus to keep the recovery on track, according to minutes of the Federal Open Market Committee’s April 24-25 meeting released yesterday in Washington. Central bankers last month affirmed their plan to hold interest rates near zero at least through late 2014 as they sought to push down an unemployment rate that has stayed above 8 percent for more than three years.
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