The euro fell for the first time in six weeks versus the dollar as reports showed the region’s economy struggling amid the debt crisis.
The yen advanced against all major currencies as weaker-than-forecast data from China and rising tensions between the two nations spurred demand for haven assets. Riskier currencies declined versus the dollar as report showed Chinese manufacturing may contract for an 11th month. The 17-nation euro declined versus most of its major counterparts before Spain’s government addresses budget issues next week.
“Even though the moves by the European Central Bank can take away tail risk, you still have a really dismal economic situation, where at best, its stagnant, and at worst, deepening recession,” said Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc., a currency brokerage.
Esiner said he expects the euro to end the year between $1.25 and $1.28.
The euro dropped 1.1 percent this week to $1.2980 in New York, its largest decline since July 6. The shared currency weakened 1.4 percent to 101.46 yen, its first weekly loss since Aug. 10. The yen strengthened 0.3 percent to 78.17 per dollar.
The common currency’s 14-day relative strength index versus the dollar fell to 66 after spending seven days above 70. A reading above 70 indicates an asset may have rallied too quickly and is be due for a correction.
Futures traders decreased bets the euro will decline against the dollar for a third week, according to Commodity Futures Trading Commission data. Net-shorts for the euro-dollar fell to 73,482 in the week ended Sept. 18.
The euro declined as Spanish Prime Minister Mariano Rajoy considered whether to request economic assistance for the indebted nation after the ECB pledged to buy bonds.
“There is caution about how much further the risk rally can go without constant stimulus injections to keep sentiment high,” Stephen Gallo, a foreign-exchange strategist at Credit Agricole SA in London, said Sept. 20. “The foreign-exchange market is also sensing some tap dancing in Spain in terms of the official request for aid.”
Options traders have pared bets the euro is going to fall against the dollar by year-end. The three-month so-called 25-delta risk reversal rate was minus 0.88 percent yesterday, signaling greater demand for euro puts that give the right to sell the shared currency, versus calls. The rate was minus 1.47 percent a month ago.
Stress in the European financial markets is easing, reaching the least since July 2007, according to Bloomberg’s Euro Area Financial Conditions Index. The index rose to zero this week for the first time since 2007 after averaging minus 2.8 during the past year.
Rajoy’s government will unveil additional austerity measures by the end of the month based on recommendations made in July, including a possible increase in the retirement age, shifting from labor to consumption taxes and deregulating closed professions, according to European officials.
The shared currency had its biggest weekly decline versus the yen since July 6 as services and manufacturing in the region shrank to a three-year low. Economic growth in Germany will slow to 0.8 percent for 2012 from 3 percent last year, the Kiel, Germany, ZEW Institute for the World Economy said on Sept. 13.
A preliminary reading was 47.8 for a China purchasing managers’ index released Sept. 19 by HSBC Holdings Plc and Markit Economics, compared with a final level of 47.6 last month.
The Dollar Index rose 0.6 percent to 79.391, as investors demanded the safety of U.S. Treasuries. In times of economic stress investors seek dollar-denominated assets because it is the world’s reserve currency.
Ten-year notes extended their run of gains to five days, the longest in four weeks, with the yield declining 11 basis points, or 0.11 percentage point, to 1.75 percent.
Australia’s dollar fell 0.9 percent to $1.0458 and declined 1.2 percent to 81.74 yen. It touched a seven-day low of $1.0368 on Sept. 20. The Mexican peso fell 1.1 percent to 12.8585, its biggest weekly loss versus the dollar since June 1.
Brazil’s real underperformed its high-yielding counterparts as the central bank sold reverse currency swaps for the fourth time in four days. Finance Minister Guido Mantega reiterated that the government won’t let the real strengthen.
The real fell 0.6 percent to 2.0231 per dollar and on Sept. 17, the day of the sale it declined the most since July versus the U.S. currency.
The Japanese currency recovered losses earlier in the week from investors speculating the Bank of Japan would expand monetary easing. The central bank did follow the Federal Reserve and the ECB in expanding its balance sheet by 10 trillion yen to 55 trillion yen ($700 billion) despite investor speculation it would not enough to spur economic growth.
The yen gained 0.8 percent last week, the biggest advance among the 10 developed-nation currencies on the Bloomberg Correlation-Weighted Indexes. The dollar rose 0.5 percent and the euro weakened 0.8 percent.
China and Japan’s worst diplomatic crisis since 2005, concerning the East China Sea Islands, is putting at risk a trade relationship that’s tripled in the past decade to more than $340 billion and spurred demand for yen-denominated assets. The yen is traditionally bought in times of economic uncertainty because of the nation’s status as a global net creditor.