Euro Strengthens After Italy’s Borrowing Costs Drop; Yen Weakens

The euro advanced as Italian and Spanish borrowing costs dropped at debt sales even after Moody’s Investors Service lowered the two countries’ credit ratings.

The common currency strengthened against 12 of its 16 major counterparts as a German report showed investor confidence increased more than economists forecast. The yen fell to a three-week low versus the dollar after the Bank of Japan said it would increase the size of its asset-purchase fund. Moody’s Investors Service yesterday cut the ratings of six European nations, citing the region’s debt crisis.

“The Moody’s decision could not be a surprise, and the euro has held up in a worse situation,” said Peter Rosenstreich, chief currency analyst at Swissquote Bank SA in Geneva. “The euro may be under pressure in the near term, but in a broader context I think the overall economic environment has improved and the appetite for risk will continue.”

The euro gained 0.8 percent to 103.07 yen at 7:26 a.m. in New York after rising to 103.29 yen on Feb. 9, the most since Dec. 12. The single currency rose 0.1 percent to $1.3196. The yen declined 0.7 percent to 78.11 per dollar after dropping to 78.19, the lowest since Jan. 25.

Italy sold 6 billion euros of debt, meeting its target as its three-year borrowing costs fell to 3.41 percent, the lowest since March. Spain sold 12-month bills at an average rate of 1.899 percent, the least since October 2010, according to data compiled by Bloomberg. Belgium, Greece and the Netherlands also sold debt today.

German Confidence

The ZEW Center for European Economic Research in Mannheim said its index of German investor confidence climbed to a 10-month high of 5.4 from minus 21.6 in January. Economists forecast a gain to minus 11.8, according to a Bloomberg survey.

Moody’s downgraded Italy, Spain and Portugal, and said it may strip France and Austria of their top Aaa ratings.

UBS AG raised its one-month euro forecast to $1.30 from $1.20, the bank said in an e-mailed note yesterday. “We have revised our currency forecasts, after the removal of some of the tail risks in the euro zone, the better macro environment, and the ECB’s ongoing liquidity measures,” UBS said.

The yen fell against all but one of its major counterparts after the central bank increased its asset-purchase fund by 10 trillion yen to 30 trillion yen, expanding economic stimulus measures for the first time since October. The BOJ also said it will target 1 percent inflation “for the time being.”

Greece Concern

The euro pared gains versus the dollar amid concern the region’s debt crisis will worsen.

Greece’s gross domestic product dropped 7 percent from a year earlier in the fourth quarter after contracting a revised 5 percent on an annual basis in the third quarter, the Hellenic Statistical Authority said in an e-mailed statement today.

The implementation of Greece’s austerity measures “is not going to happen in the form desirable by most of those in Europe,” said Alex Sinton, a senior dealer at ANZ National Bank Ltd. in Auckland. “The euro is looking tired.”

The euro has declined 3.9 percent in the past six months, the second-worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 4.2 percent, and the yen rose 0.5 percent.

The pound fell for the first time in three days against the euro after Moody’s said Britain risks losing its top credit rating should the economy deteriorate.

A house-price index by the Royal Institution of Chartered Surveyors was unchanged at minus 16 in January from the previous month, indicating more surveyors saw price declines than gains, the London-based group said in a statement today.

Moody’s “has given sterling a punch in the ribs,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “Compounding that, firmer ZEW confidence figures have kept the downward pressure on the pound against the euro.”

The pound dropped 0.2 percent to $1.5736, and declined 0.3 percent to 83.85 pence per euro.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE