Euro Advances Versus Most Major Peers as ECB Buys Italian Bonds

The euro rose against the majority of its most-traded counterparts as a decline in Italian bond yields overshadowed concern Europe’s debt crisis is worsening.

The 17-nation currency fluctuated versus the dollar and yen after rising from five-week lows as two people with knowledge of the trades said the European Central Bank bought more Italian government bonds, following purchases earlier today. The euro erased gains versus the yen as stocks tumbled for a second day. The Australian dollar fell below parity with the greenback for the first time in more than a month as risk appetite faded.

“There’s the possibility of the ECB coming to the rescue again, and the market is taking that as a positive,” said Lane Newman, director of foreign exchange at ING Groep NV in New York. “It’s a market that has been short risk and looks a little tired,” he said, referring to sentiment against riskier assets.

The euro was little changed at $1.3458 at 5 p.m. in New York, after weakening earlier to $1.3422, the lowest level since Oct. 10. The shared currency traded at 103.62 yen after falling to 103.41 yen, matching yesterday’s level, also the weakest since Oct. 10. The dollar was 0.1 percent weaker at 76.98 yen.

The shared currency pared gains versus the dollar as the Standard & Poor’s 500 Index sank 1.7 percent and the MSCI World Index retreated 1.4 percent. Equities extended declines after Reuters reported a euro-area official as saying there are no aid plans for Italy from the European Financial Stability Facility. The S&P GSCI Index of raw materials dropped 2.9 percent.

Three-Year High

The euro strengthened earlier for the first time in four days against the dollar and yen even as the rate banks pay to convert euro payments into dollars reached the most expensive since December 2008.

The cost for European banks to fund in dollars rose to a three year high for a third day, with three-month cross currency basis swaps falling as much as 132 basis points, or 1.32 percentage points, below the euro interbank offered rate, data compiled by Bloomberg show.

“Year-end liquidity is tight, and the central banks anticipate this and they have increased the size of the swap lines that are available for European banks,” said Greg Anderson, a senior currency strategist at Citigroup Inc. in New York. “Banks aren’t really accessing it, because there are fees and stigma.”

Libor-OIS Gap

The gap between the London interbank offered rate and the overnight index swap, or what traders expect the Federal Reserve’s benchmark to be over the term of the contract, widened to 40 basis points, the highest level since June 2009. The wider the spread, the more reluctant banks are to lend to one another.

The euro was little changed over the past week versus nine developed-nation counterparts, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar advanced 2.4 percent and the yen climbed 2.7 percent.

“Right now it’s more about the uncertainty about what’s on the other person’s balance sheet, just because of the uncertainty of what banks will be around to get the money back,” said Mark McCormick, a currency strategist in New York at Brown Brothers Harriman & Co. “The ECB’s strategy seems like just a containment strategy, as opposed to an aggressive trying-to-support-the-periphery-bond-yield strategy.”

Australia’s dollar fell as much as 1.1 percent to 99.74 U.S. cents in its first time below parity with its U.S. counterpart since Oct. 12, before trading at $1, down 0.8 percent.

Sterling Gains

The pound strengthened against the dollar, snapping a three-day decline, after British retail sales unexpectedly increased in October. Sterling gained as much as 0.5 percent to $1.5813 before trading at $1.5755, up 0.2 percent. The currency rose 0.2 percent versus the euro to 85.42 pence.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, dropped for the first time in four days as builders broke ground on more American homes than forecast in October, an annualized 628,000 . Fewer first-time claims for unemployment insurance payments were filed in the U.S. last week, 388,000, Labor Department data showed.

The gauge of the greenback, which is weighted 57.6 percent to movements in the euro, fell 0.1 percent to 78.295.

Yields on 10-year Italian government debt fell 17 basis points to 6.84 percent after climbing 15 basis points earlier to 7.15 percent. They reached a euro-era record of 7.48 percent on Nov. 9. The people with knowledge of ECB purchases declined to be identified because the deals are private.

Bond Auctions

The euro weakened earlier after Spain sold 3.56 billion euros ($4.8 billion) of a new 10-year bond at an average yield of almost 7 percent, up from 5.43 percent when it sold the securities Oct. 20. The nation was originally seeking to raise up to 4 billion euros from the sale. An auction of French notes due in July 2016 drew a yield of 2.82 percent, up from 2.31 percent at the previous offer of the securities on Oct. 20.

“Not only have Italian and Spanish debt instruments been steadily net sold in recent months, we are now seeing worsening sentiment toward Belgian and French securities in recent weeks as well,” Samarjit Shankar, a managing director for the foreign-exchange group in Boston at Bank of New York Mellon, wrote to clients today. He said his comments were based on flow data from the world’s largest custodial bank.

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