Euro Drops as Spain’s Bailout Fuels Debt-Crisis Concern

The euro fell against most of its major peers as Spain’s bailout spurred concern that the sovereign-debt crisis is deepening as it spreads among indebted nations before Greek elections June 17.

The 17-nation currency earlier rose, touching a two-week high, after Spain asked for as much as 100 billion euros ($126 billion) to save its banking system, making it the fourth member of the currency bloc to seek a rescue. The bailout helped move Italy to the front lines of the crisis, as bets increased Europe’s third largest economy may be the next one to succumb. Norway’s krone strengthened as consumer prices rose more than economists forecast last month.

“Given that we’ve decisively rejected any sustained price action above $1.26 and have a lot of unanswered questions around the Spanish bank package and the Greek elections this weekend, the near-term prognosis for the euro is not good,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. (WBC) in New York.

The euro fell 0.3 percent to $1.2482 at 5 p.m. New York time. It earlier climbed as much as 1.2 percent to $1.2671, the highest since May 23 and the biggest intraday advance since Nov. 30. The euro fell 0.3 to 99.16 yen after rising as much as 1.5 percent. The dollar declined 0.1 percent to 79.44 yen.

Futures Wagers

Futures traders increased net bets against the shared currency versus the dollar to a record high for a fifth straight session last week. So-called net shorts rose by 11,003 to 214,418 contracts for the period ended June 5, Commodity Futures Trading Commission data showed.

“The move up in the euro overnight was a healthy move because it probably took out a lot of weak shorts,” said Steve Butler, director of foreign-exchange trading in Toronto at Bank of Nova Scotia’s Scotia Capital unit. “Seeing it back below $1.25 here today is very disappointing price action, and I wouldn’t be surprised to see the euro continue its grind lower this week going into the Greek elections over the weekend.”

The 14-day relative strength index for the euro versus the dollar rose above 30 on June 4 for the first time in 10 days, ending the longest streak since 2008. When the index moves below 30 it indicates an asset’s decline may have been overdone. The gauge reached 37 today.

The British pound gained 0.1 percent to $1.5486 and added 0.4 percent to 80.61 pence per euro.

Pound Strength

“While the U.K. has its own intractable problems and a pretty weak economic environment, it probably still looks if you want to remain in Europe it’s a slightly better bet than the euro,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “There are still plenty of risks out there as far as the euro is concerned, so it’s still a case of markets looking to sell rallies.”

The Dollar Index (DXY), which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, rose 0.1 percent to 82.622 after falling as much as 1 percent.

Seven months after winning a landslide victory, Spanish Prime Minister Mariano Rajoy was forced to abandon his bid to recapitalize banks without external help. The bailout loan will be channeled through the state’s bank-rescue fund, known as FROB, and extended to lenders that need it, Economy Minister Luis de Guindos Jurado said in Madrid on June 9.

Currency Measure

The European currency has fallen 3.7 percent in the past six months, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar has gained 2.4 percent and the yen is 0.3 percent stronger.

Spanish and Italian 10-year bonds fell for a fourth day, reversing earlier gains. The Spanish yield rose 29 basis points to 6.51 percent, while the rate on the Italian securities climbed 26 basis points to 6.03 percent.

Italy’s economy, the third-biggest in the region, shrank 0.8 percent in the first three months of this year from the fourth quarter, Istat, the Rome-based national statistics institute said, confirming an initial estimate. Household spending decreased 1 percent and exports fell 0.6 percent.

Italy has 2 trillion euros of debt, more as a share of its economy than any advanced nation after Greece and Japan. The Treasury has to sell more than 35 billion euros of bonds and bills per month -- more than the annual output of each of the three smallest euro members, Cyprus, Estonia and Malta.

Growth Outlook

“The growth outlook for most of the euro area is already bleak,” Guillermo Felices, head of European currency strategy in London at Barclays Plc, and Yuki Sakasai, a New York-based currency strategist, wrote in a research note. “Without growth, the euro will remain under pressure.”

Norway’s krone strengthened against the dollar as data showed underlying consumer prices rose 1.4 percent in May from a year earlier, compared with a 1.1 percent median estimate in a Bloomberg survey of nine economists.

The krone rose 0.1 percent to 6.0457 per dollar and earlier climbed as much as 1.5 percent.

The euro has dropped 5.8 percent against the greenback since the start of May amid concern Greece will leave the common currency. The nation is scheduled to hold elections on June 17 after the previous vote last month failed to produce a viable governing majority.

Rather than a euro failure, an orderly Greek exit from the currency bloc has Nobel laureate Joseph Stiglitz and Nomura Holdings Inc. chief strategist Jens Nordvig predicting a stronger and more stable monetary union.

The nation accounts for just 2.3 percent of the 17-nation trading bloc’s gross domestic product. It also has 356 billion euros, or 4.3 percent of the region’s total debt, according to data compiled by Bloomberg. The area’s trade deficit last year would have been a surplus without its weakest member, according to European Union data.

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Joseph Ciolli in New York at jciolli@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at Dliedtka@bloomberg.net

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