Euro Weakens on Italy, Spain Uncertainty; Aussie Declines

The euro fell against the yen, following yesterday’s biggest drop since June, amid corruption allegations against Spanish Premier Mariano Rajoy and uncertainty ahead of Italian elections this month.

The 17-nation currency halted this year’s climb against the dollar before European Central Bank policy makers meet on Feb. 7. The yen rose against most major peers as investors bought haven assets after Asian equities slid. Australia’s dollar fell after the central bank kept interest rates unchanged while saying the inflation outlook allows scope for further easing.

“The risks are to the downside for euro and a correction back towards $1.34 seems very logical, given the speed with which we’ve moved so far,” said Robert Rennie, the chief currency strategist at Westpac Banking Corp. (WBC) in Sydney. Purchasing euro-zone assets becomes difficult “once you start to become concerned about the outlook for European politics.”

The euro fell 0.3 percent to 124.46 yen as of 8:09 a.m. London time from yesterday, when it dropped 1.4 percent, the most since June 25. It declined 0.2 percent to $1.3485. The yen advanced 0.1 percent to 92.30 per dollar after yesterday falling as low as 93.18, the weakest since May 13, 2010.

Spain’s Rajoy, facing opposition calls to resign amid contested reports about illegal payments, traveled to Berlin yesterday as euro-area leaders schedule a series of meetings this week ahead of a Feb. 7-8 European Union summit. The yield on 10-year Spanish bonds climbed to 5.48 percent, the highest since Dec. 11.

Italian Election

A poll showed former Italy Premier Silvio Berlusconi closed the gap on front-runner Pier Luigi Bersani even as he appeals a four-year prison sentence for tax fraud. Voting takes place on Feb. 24-25.

The ECB, which has held its main refinancing rate at 0.75 percent since July, will make no change at its next policy decision on Feb. 7, according to all 58 economists surveyed by Bloomberg News. ECB President Mario Draghi may make more dovish remarks at the meeting without the central bank altering policy, according to analysts.

The euro slipped 0.2 percent in the past week, paring its gain so far in 2013 to 2.3 percent, according to Bloomberg Correlation-Weighted Indexes which track 10 developed-nation currencies. The yen has dropped 6.8 percent since Dec. 31 and the dollar is down 0.1 percent.

Stretched Crosses

“We’d gone one way for the whole month of January and all those euro crosses were stretched,” said Tim Kelleher, the Auckland-based head of institutional foreign-exchange sales at ASB Institutional, a unit of Commonwealth Bank of Australia. (CBA) “The risk is that the euro stays capped ahead of the ECB.”

The JPMorgan G7 Volatility Index, calculated based on premiums on currency options, climbed to 9.3 percent, the most since Aug. 2. It had dropped to a more than five-year low of 7.06 on Dec. 18,

The MSCI Asia Pacific Index of stocks declined 1.1 percent.

Australia’s dollar slid against most of its 16 major peers after the Reserve Bank of Australia kept its benchmark interest rate unchanged at the half-century low of 3 percent.

“Aussie selling pressure stems from the comments that the RBA made that inflation outlook gives scope for further easing,” said Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong. “The market has taken that to mean the RBA is sitting ready to ease.”

RBC expects the next interest rate cut to come in the second quarter, according to Trinh.

The so-called Aussie fell 0.2 percent to $1.0416. It declined 0.4 percent to 96.06 yen, after touching 97.08 yesterday, the highest since August 2008.

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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