Euro Approaches Two-Year Low on Spanish Banks Concern

The euro fell to the lowest level in almost two years against the dollar as Spain struggled to rescue its troubled banks, adding to signs the European debt crisis is spreading to the region’s larger economies.

The 17-nation currency slid for a seventh day versus the yen, the longest losing streak in four months, after Italy sold less than its maximum target at a debt auction. The yen and dollar strengthened as investors sought safer assets after a European report showed economic confidence dropped more than economists estimated in May. Asian currencies weakened, pushing the Bloomberg-JPMorgan Asia Dollar Index to the lowest level since September 2010.

“The market has lost confidence in the euro,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “We’re a little oversold but certainly the path is very clear to possibly testing $1.20 or the $1.1877 low of 2010. People are battening down the hatches and continue to trade very defensively.”

The euro declined 1.1 percent to $1.2367 at 5 p.m. New York time. The single currency fell 1.6 percent to 97.79 yen. It dropped to 97.76 yen, the lowest level since Jan. 18. The yen gained 0.5 percent to 79.08 per dollar after touching 78.87, the strongest since Feb. 17.

The shared currency fell to $1.2362, its weakest since July 2010. It reached $1.1877 in June that year, which was the lowest level in four years, after escalating concern about Greece led to the bloc’s first bailout. Since its inception in 1999, the euro has traded as low as 82.30 U.S. cents, in 2000, and as high as $1.6038 in July 2008.

‘Downward Spiral’

The euro has depreciated 6.6 percent against the dollar this month, the most since September, and slid 7.4 percent versus the yen.

The yield on German two-year government notes fell to zero for the first time before trading at 0.010 percent. The average since the euro’s inception is 2.79 percent.

“The euro could go lower, maybe it can go down towards $1.20,” said Jane Foley, a senior currency strategist at Rabobank International in London. “The question is, will the downside risks turn into a downward spiral?”

Spain’s 10-year bond yield rose as high as 6.70 percent, approaching the 7 percent level that led to bailouts in Greece, Ireland and Portugal, after central bank Governor Miguel Angel Fernandez Ordonez resigned a month early amid criticism over the nationalization of Bankia group.

European Commission

The European Commission called for direct euro-bloc aid for troubled banks and touted a Europe-wide deposit-guarantee system and common bond issuance as antidotes to the debt crisis now threatening to overwhelm Spain.

The commission, the European Union’s central regulator, sided with Spain in proposing that the euro’s permanent bailout fund inject cash to banks instead of channeling the money via national governments. It also offered Spain extra time to squeeze the budget deficit.

“The focus was on Greece and the way the electorate sentiment was going,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. (WBC) in New York. “That’s now completely been pushed to the sidelines by concerns about Spain. Europe’s just so broad and lacking in policy coordination, that’s the problem.”

Greece’s New Democracy party, which supported the international bailout and austerity measures, and the anti- bailout Syriza party are tied for first place in the country’s June 17 vote, according to an opinion poll by Pulse, Naftemporiki newspaper reported.

The euro has declined 2.1 percent this year against nine developed-market counterparts tracked by Bloomberg Correlation- Weighted Indexes. The dollar climbed 3.1 percent, the best performer, while the yen was little changed.

Italian Borrowing

The yen surged at least 0.5 percent against all 16 of its major peers tracked by Bloomberg after Italian borrowing costs climbed and European confidence plummeted, boosting investor demand for the safest assets.

Italy sold 5.73 billion euros of bonds as yields rose from the previous sale in April. The Treasury auctioned 10-year debt at a rate of 6.03 percent, the highest since Jan. 30. Investors bid for 1.4 times the amount offered, down from 1.48 last month. Italy also sold five-year notes to yield 5.66 percent, compared with 4.86 percent last month.

An index of executive and consumer sentiment among the euro member nations fell to 90.6 from a revised 92.9 in April, the European Commission said today. That’s the lowest since October 2009 and below the 91.9 forecast by economists, according to the median of 28 estimates in a Bloomberg News survey.

Technical Analysis

The euro faces resistance levels at $1.2305 and $1.2150, according to Niall O’Connor, a technical analyst at JPMorgan Chase & Co. in New York. If it breaks below $1.20, he said, it could depreciate further.

“There are going to be some psychological levels around $1.20,” O’Connor said. “If we break it, this will be a new leg down. Intraday breaks should be enough given price action these past couple of days.”

The euro would stabilize if it rallied above $1.2510 to $1.2515, where it traded yesterday, O’Connor said. It would retrace higher if it appreciated above $1.2625.

The euro will strengthen to 104 yen by year-end, according to the average forecast in a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.

‘Fragile’ Sentiment

The Asia Dollar Index has lost 2.6 percent this month, the biggest loss since September, as exchange data showed global funds pulled $7.7 billion from South Korean, Taiwanese and Indonesian stocks. The gauge dropped to as low as 113.80, the weakest since Sept. 24, 2010.

“Sentiment toward emerging-market assets remains fragile on concern over the Spanish banking sector,” said Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong. “We expect a risk-off environment, with currencies on the defensive and lower rates.”

The Australian dollar fell for a second day, dropping 1.5 percent to 97.04 U.S. cents, after a government report showed retail sales unexpectedly slid in April for the first time in 10 months.

Sales declined 0.2 percent from March, when they rose a revised 1.1 percent, the Bureau of Statistics said in Sydney. The median forecast of economists in a Bloomberg News survey was for a 0.2 percent increase.

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

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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