Euro Falls to 15-Month Low Versus Dollar on ECB, Italy Auction

Euro Drops to 10-Year Low Versus Yen
A fire lit to warm protesters burns in front of the headquarters of the European Central Bank in Frankfurt am Main, Germany. Photographer: Ralph Orlowski/Getty Images

The euro fell to a 15-month low against the dollar as Italian bond yields rose after the nation sold less than its maximum target at an auction, highlighting funding difficulties amid the region’s sovereign-debt crisis.

The 17-nation currency dropped to a decade low versus the yen as concern increased that the European Central Bank will inject more cash into the financial system to avoid a credit crunch from the region’s debt crisis. The yen and dollar strengthened against most of their major counterparts as demand increased for safer assets.

“The Italian debt auction was a little bit underwhelming,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. “The fact that the 10-year yield didn’t come down and they sold a bit less than that maximum target amount, that spurred further euro selling.”

The euro rose 0.2 percent to $1.2961 at 5 p.m. in New York after falling to $1.2858, the weakest level since Sept. 14, 2010. The common currency dropped 0.2 percent to 100.63 yen after falling to 100.06, the lowest level since June 2001. The yen appreciated 0.4 percent to 77.64 per dollar.

The euro erased its drop against the dollar as he currency’s 14-day relative strength index against the dollar traded at 33.8 today, approaching the 30 level that some traders see as a sign it may be oversold and poised to reverse direction.

Relative Performance

The shared European currency is the worst performer among 10 developed-nation currencies this year, declining 1.7 percent, according to Bloomberg Correlation-Weighted Currency Indexes. The euro today touched its lowest level since 2002 against the index. The dollar has advanced 1.5 percent and the yen has gained 4.8 percent.

South Africa’s rand has declined 19 percent against the dollar in 2011, the most of the U.S. currency’s major peers, according to Bloomberg data, followed by Mexico’s peso, with a 11.8 percent loss. The yen has advanced 4.5 percent for the largest gain against the greenback.

The yield on benchmark Italian 10-year bonds traded above 7 percent, the level that forced Greece, Portugal and Ireland to seek bailouts, after the nation auctioned debt.

The Treasury in Rome sold 2.5 billion euros ($3.2 billion) of securities due in 2014, less than the 3 billion euro maximum for the sale. The yield was 5.62 percent, down from 7.89 percent at the previous sale on Nov. 29. The Treasury also auctioned securities due in 2018, 2021 and 2022.

Italy Borrows

Italy plans to raise almost 450 billion euros from debt sales next year, enough to cover 202 billion euros of maturing bonds and finance a 23.6 billion-euro deficit, Maria Cannata, director of public debt, said in a Dec. 24 interview with newspaper Il Sole 24 Ore.

“If you look at where the 10-year Italian yields are, they’re still nearing 7 percent and the German 10-year is down,” said Mary Nicola, a currency strategist at BNP Paribas SA in New York. “The spread is widening, so that can’t bode well for the euro.”

The difference, or spread, between U.S. two-year notes and similar maturity German debt rose to 11 basis points today, from a low this year of minus 131 basis points. The widening interest-rate differential, fueled by dropping bund yields, signals increased investor demand for the safety of the German securities amid the crisis.

Central Banking

The ECB cut its benchmark interest rate by 25 basis points in November and December, to a record low of 1 percent. The cuts came after it raised the benchmark rate by the same amount earlier this year.

Canada’s dollar rose to an 11-month high against the euro after the Italian debt auction. The loonie, as the currency is known, advanced 0.3 percent to C$1.3221 per euro. It gained 0.4 percent against its U.S. counterpart to C$1.0199.

“Money’s flowing out of Europe and that means out of the euro,” said Tony Crescenzi, a portfolio manager and strategist at Pacific Investment Management Co. in Newport Beach, California, which manages the world’s biggest bond fund. “The world is still not all that interested in owning European bank debt, European government debt, and that means de-risking,” he said in an interview on Bloomberg Radio.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, fell 0.2 percent to 80.363. The measure is head for a 1.8 percent gain this year after appreciating 1.3 percent last year, the first time it’s gained two years in a row since 2001.

ECB Loans

The ECB’s balance sheet expanded to a record 2.73 trillion euros, the Frankfurt-based central bank said yesterday. Lending to euro-area banks jumped 214 billion euros to 879 billion euros in the week ended Dec. 23, the ECB said.

The central bank last week awarded 523 banks three-year loans totaling a record 489 billion euros to encourage lending to companies and households and prevent a credit shortage. Policy makers have resisted calls to step up their government bond purchases to cap borrowing costs in Europe’s peripheral nations, choosing instead to assist the region’s financial system with unlimited cheap loans.

“Things are not looking good in Europe and that could continue to weigh on the euro,” said Thio Chin Loo, a Singapore-based senior currency analyst at BNP Paribas SA. “The size of the balance sheet of the ECB suggests banks need help, and the central bank may expand it further. There’s also concern about government funding early next year when lots of debt will come due.”

The ECB also has more room to cut interest rates to a record low early next year after reports showed the sovereign debt crisis is damping inflation pressures.

The rate of growth in M3 money supply, which the ECB uses as a gauge of future inflation, fell to 2 percent in November from 2.6 percent in October, the Frankfurt-based central bank said today. Growth in loans to households and companies across the 17-nation euro area also slowed, while inflation in Germany, the region’s largest economy, decelerated in December.