Euro Falls as Italian Borrowing Costs Increase; Franc Weakens

Euro Declines as Italy Prepares to Sell Debt
The euro declined versus 12 of its 16 major counterparts on concern nations such as Italy and Greece will struggle to resolve their debt crises even with new governments. Photographer: Chris Ratcliffe/Bloomberg

The euro dropped for the first time in three days versus the dollar and yen as Italy’s borrowing costs increased at a five-year note sale and Spain’s yields relative to Germany’s reached a euro-era record.

The 17-nation currency slid the most against the yen and South Korean won among its major counterparts tracked by Bloomberg on contagion concern. The Swiss franc weakened versus the dollar as producer and import prices fell for a sixth month in October. The pound slipped as an index of U.K. employers’ hiring intentions retreated.

“The ultimate bellwether is really Italian and Spanish bonds,” said Alan Ruskin, global head of Group-of-10 currency strategy at Deutsche Bank AG in New York. “Spanish bonds got absolutely hammered today. That has really tempered the tone.”

The euro depreciated 1 percent to 105.07 yen at 5 p.m. New York time, after rising 0.7 percent during the previous two days. The shared currency declined 0.9 percent to $1.3633. The yen gained 0.1 percent to 77.07 per dollar.

The franc snapped a two-day gain versus the dollar, sliding 0.9 percent to 90.82 centimes versus the dollar after the Federal Statistics Office said producer and import prices decreased 1.8 percent last month from a year earlier.

Swiss Currency

Swiss National Bank President Philipp Hildebrand is proving intervention in foreign-exchange markets can succeed as speculators bow to his decision to cap the franc against the euro as he seeks to stave off the threat of deflation. The currency has depreciated 12 percent against the euro and 15 percent versus the dollar since Sept. 5, the day before the central bank imposed a ceiling at 1.20 per euro.

Sterling fell 1 percent to $1.591 after the Chartered Institute of Personnel and Development said its gauge of U.K. hiring fell to minus 3 in the fourth quarter from minus 1 in the previous three months.

The euro will trade lower versus the dollar as Europe’s intensifying debt crisis becomes harder to contain, according to UBS AG, which predicted the Swiss National Bank will raise the euro’s floor with the Swiss franc.

The 17-nation currency will fall to $1.35 versus the U.S. dollar in one month, $1.30 in three months and $1.25 in 12 months on concern that it may be too late for European leaders to turn the region’s sovereign-debt crisis around, Syed Mansoor Mohi-uddin, a foreign-exchange strategist in Singapore, said in a note to clients today.

UBS Forecast

UBS forecast earlier this month that the euro would trade at $1.40 by year-end. The currency will fall as the European Central Bank reckons with a euro-zone recession and potentially cuts interest rates further, according to Mohi-uddin, who couldn’t immediately be reached for comment.

“Europe’s banks likely face increasing scrutiny in the weeks and months ahead, and any wobbles will affect national balance sheets at the worst possible time,” Mohi-uddin wrote. The dollar and the yen “have their own liabilities, but their relative reliability to the euro zone remains unquestioned.”

Currencies of commodity exporters dropped as stocks and raw-material prices fell. The Standard & Poor’s 500 Index lost 1 percent, and the Thomson Reuters/Jefferies CRB Index of raw materials fell 0.7 percent.

Brazil’s real and Norway’s krone were the biggest losers against the dollar among major currencies, with the real falling 1.3 percent to 1.7669 versus the greenback and the krone depreciating 1.4 percent to 5.7172.

Risk Demand

“Risk appetite has been gradually diminishing, and that’s probably going to keep the euro pinned to the downside,” said Jeremy Stretch, executive director of currency strategy at Canadian Imperial Bank of Commerce in London. “The debt dynamics in Europe remain discouraging.”

Italy’s Treasury auctioned 3 billion euros ($4.1 billion) of September 2016 notes, the maximum target. The yield was 6.29 percent, up from 5.32 percent at the previous auction and the highest since June 1997. Demand rose to 1.47 times the amount on offer, from 1.34 times last month.

The 10-year Italian yield rose 26 basis points, or 0.26 percentage point, to 6.68 percent, approaching the euro-era record of 7.48 percent set Nov. 9.

“You had the five-year Italian auction and it went OK, but the rate was quite high for Italy,” said Mary Nicola, a currency strategist at BNP Paribas SA in New York. “It’s still a strain on the market. The euro’s going to be guided by what happens in the bond markets.”

Spain’s Bonds

The extra yield investors demand to lend to Spain rather than Germany for a decade rose to 432 basis points, the most since the 1999 start of the euro and up from 396 basis points on Nov. 11. The European Central Bank started propping up the Italian and Spanish bond markets with debt purchases in August.

Former European Union Competition Commissioner Mario Monti will head a new government as Italy reaches outside the political arena for a leader to restore confidence in its ability to cut the euro region’s second-biggest debt.

Italy’s President Giorgio Napolitano offered the position of premier to Monti after the resignation of Silvio Berlusconi. Prime Minister George Papandreou of Greece resigned last week to make way for a coalition led by former ECB Vice President Lucas Papademos.

Germany’s Chancellor Angela Merkel’s Christian Democratic Union party voted to allow euro states to quit the currency area, endorsing the prospect of a move not permitted under euro rules. The resolution, which requires the assent of Merkel’s two coalition partners before becoming policy, is part of Merkel’s push for closer political ties and tighter budget rules in the European Union, with euro countries setting the pace.

The euro has declined 1 percent over the past six months, according to Bloomberg Correlation-Weighted Indexes, which track the currencies of 10 developed nations. The dollar has gained 2.5 percent.

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