Euro Falls Most in 2 Months on Growth Concern; Yen Gains

The euro dropped the most in two months against the dollar as services and manufacturing in the region shrank to a three-year low, adding to evidence the central bank will need to do more to spur growth.

The yen and the dollar strengthened against most of their major counterparts as demand for the perceived safety of those nations’ assets increased after separate reports showed China’s manufacturing and Japanese exports declined for a third month. The shared currency fell against all its major counterparts as Spanish bond yields rose for the first time in three days. Australia’s dollar and South Africa’s rand led losses among higher-yielding currencies.

“There is caution about how much further the risk rally can go without constant stimulus injections to keep sentiment high,” said Stephen Gallo, a foreign-exchange strategist at Credit Agricole SA in London. “The foreign-exchange market is also sensing some tap dancing in Spain in terms of the official request for aid.”

The euro dropped 0.6 percent to $1.2968 at 5 p.m. New York time, after sliding 1.1 percent, the biggest decline since July 20. The shared currency weakened 0.8 percent to 101.47 yen and declined for a fourth day versus the Swiss franc, depreciating to 1.21010 francs. The yen strengthened 0.2 percent to 78.24 per dollar.

Dollar Buying

Cumulative net-inflows in to U.S. Treasuries were twice as strong today, compared with the daily average during the past year, according to client data from Bank of New York Mellon, which has more than $26 trillion under administration.

The Dollar Index rose 0.5 percent to 79.422, after the data from China and Japan added to evidence that Asian economies are slowing, spurring demand for the safety of U.S. Treasuries.

Ten-year notes extended their run of gains to the longest in four weeks with the yield declining as much as five basis points, or 0.05 percentage point, to 1.72 percent. In times of economic stress investors seek dollar-denominated assets because it is the world’s reserve currency.

A preliminary reading was 47.8 for a China purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics, compared with a final level of 47.6 last month. Japan’s overseas shipments slid 5.8 percent on weakness in demand from Europe and China.

Yen Gains

The yen rose against the dollar to the strongest level in a week, even after the Bank of Japan unexpectedly added 10 trillion yen ($127 billion) in stimulus yesterday. The Japanese currency is considered a safe haven because of the nation’s status as a global net-creditor.

The extra yield investors receive for purchasing a U.S. 10-year security versus a similar maturity Japanese bond fell to 96 basis points, touching the least in a week.

“We’ve actually seen that spread widen in favor of the dollar,” Mike Moran, a senior currency strategist at Standard Chartered in New York, said in an interview on Bloomberg Television’s “Lunch Money” with Sara Eisen. “We’re looking at dollar-yen to track a little bit higher, maybe up to 80 to 82.”

The euro weakened against most of its 16 major peers even after Spain’s borrowing costs fell at a 4.8 billion-euro auction of three- and 10-year debt, the biggest since January. The sale came amid expectations the nation will ask the European Central Bank to buy its debt.

Economic Reading

A composite index based on a survey of purchasing managers in euro-area services and manufacturing industries dropped to 45.9 for September, the lowest since June 2009, London-based Markit Economics said in an initial estimate. A reading below 50 indicates contraction.

“One of the big problems that remains unresolved in the euro area is a lack of growth,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “We still anticipate the euro will continue to weaken and expect a move back to $1.20 over the next six to 12 months.”

The euro has risen 2.1 percent in the past month, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar fell 2.2 percent and the yen weakened 0.8 percent. It 17-nation currency has rallied 1.7 percent since Sept. 6 when the European Central Bank pledged unlimited bond purchases to regain control of interest rates.

Trade Ideas

Nomura Holdings Inc. increased its euro-dollar forecast to $1.28 from $1.18 for the third quarter of this year, according to a note to clients yesterday. The Tokyo-based bank expects the shared currency to trade at $1.28 at year-end compared to a previous estimate of $1.15.

Australia’s currency fell as the Chinese data clouded the prospects for the South Pacific nation’s resource exports.

“The market was probably expecting a bit more of a bounce” in the Chinese data, said Emma Lawson, a currency strategist at National Australia Bank Ltd. in Sydney. “The Aussie is a little bit lower. There’s just a little bit of disappointment there.”

The so-called Aussie dropped 0.4 percent to $1.0436. South Africa’s rand declined 0.4 percent to 8.3069 per dollar.

The People’s Bank of China Governor Zhou Xiaochuan wrote in a commentary published in the Financial News this week that the central bank will keep the continuity and stability of monetary policies and at the same time make adjustments that are more forward-looking, targeted and effective.

China’s yuan rose to a five-month high, breaching the 6.3 per dollar level.

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