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Euro Weakens as Leaders Ask Merkel to Contain Debt Crisis

The euro fell from the strongest in almost a month versus the dollar as German Chancellor Angela Merkel faces rising pressure from Group of 20 leaders to contain the region’s crisis, which threatens global economic growth.

The 17-nation currency weakened as Spanish 10-year bond yields rose above 7 percent and as Merkel said the new Greek government shouldn’t be granted additional budget leeway. Brazil’s real fell against most of its major counterparts as economists lowered outlooks for the nation’s growth. New Zealand’s dollar rallied to a six-week high versus the greenback after the country’s service industry grew.

“We avoided what people thought would be worst-case scenario, but the pro-bailout parties in Greece still have to form a coalition and we saw how well that went last time,” said Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut. “The attitude is still to plow in to safety and stay away from risk. The market is looking at Spain primarily over Italy because the banking sector is first and foremost what people are watching.”

The euro fell 0.5 percent to $1.2576 at 5 p.m. New York time, after strengthening as much as 0.9 percent to $1.2748, the highest since May 22. The 17-nation common currency was unchanged at 99.49 yen, while the Japanese currency fell 0.5 percent to 79.11 to the dollar.

Brazil’s Economy

Brazil’s currency depreciated for the first time in three days, falling 0.4 percent to 2.0590 per dollar. Brazil’s gross domestic product will expand 2.3 percent in 2012, compared with a forecast of 2.53 percent a week earlier, according to the median estimate in a central bank survey of about 100 analysts published today.

New Zealand’s currency reached 79.38 U.S. cents, the most since May 8, before trading at 79.19, 0.4 percent stronger than last week.

The nation’s Performance of Services Index climbed to 56.8, the highest since November 2007, according to a report by the Bank of New Zealand Ltd. and Business NZ.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, added 0.4 percent to 81.955. The gauge earlier declined to 81.161, the lowest since May 22.

The implied volatility for one-month euro-dollar options, which indicates expected swings in the underlying currencies, reached a high of 13.29 percent last week. While that’s up from 8.25 percent in April, it’s below last year’s peak of 18.42 in September. The JPMorgan G7 Volatility Index rose to 11.88 this month from 8.84 in April, the least since November 2007.

Euro Levels

The euro’s earlier break above $1.2670 was a bullish signal that may keep the 17-nation currency supported in the near-term, Barclays technical strategists, led by Jordan Kotick, wrote in a note today to clients. If the currency fails to appreciate beyond the $1.2975 to $1.3015 range, the top part of a larger bear channel, the recent strengthening will prove to be corrective in nature, they wrote.

The euro is down from this year’s high of $1.3487 on Feb. 24, and has depreciated about 6.7 percent during the past 12 months against a basket of nine developed-market peers, according to Bloomberg Correlation-Weighted Indexes.

Concern Greece would be forced to leave the euro ebbed after Antonis Samaras’s New Democracy party and the Pasok party won enough seats in yesterday’s vote to control Greece’s 300-member parliament should they join forces in a coalition government.

Greek Politics

Pasok leader Evangelos Venizelos said he’d propose that President Karolos Papoulias brokers a unity government that would include second-placed Syriza, and Democratic Left. Papoulias will formally begin the process of asking Samaras to form a government when they meet today.

Greece was left with a political stalemate after the previous general election on May 6. Since then, the euro weakened 4.8 percent against the yen and lost 3.4 percent versus the dollar through last week as investors sought havens from the turmoil.

“As the pro-austerity government tries to iron out all the wrinkles and actually form a unity government, market participants will be very interested in finding out how that ends up causing either greater stability or instability for the euro zone,” said Ravi Bharadwaj, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co.

G-20 leaders are gathering in Los Cabos for a summit being dominated by the crisis in the 17-nation euro region that threatens to further erode the weakest global economy since the 2009 recession.

Spain’s Debt

The crisis escalated on June 9 when Spain asked for a bailout of as much as 100 billion euros to prop up its banks, becoming the fourth member of the trading bloc to request international aid.

Spanish 10-year yields rose as much as 41 basis points to 7.29 percent and ended the day at 7.158 percent. Greece, Ireland and Portugal sought bailouts when their benchmark borrowing costs topped 7 percent.

“We’ve been arguing for many weeks that Greece is very much a distraction and the bigger story is the much faster deceleration in global growth and deterioration in Spain.” said Andrew Cox, a currency strategist at Citigroup Inc. in New York. “Spain seems to be driving systemic risk premium and negatively weighing on the single currency.”

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