Euro Weakens to Two-Week Low Versus Dollar After Spain’s Budget

The euro fell to a two-week low against the dollar as Spanish ministers in Madrid unveiled a fresh round of budget cuts amid the prospect of a sovereign bailout.

The shared currency slid for an eighth day versus the yen, the longest streak in four months, after economic confidence in the euro area unexpectedly fell in September. The dollar weakened against most peers after claims for U.S. jobless benefits fell more than forecast. The pound rose for the first time in four days against the greenback after a report showed the economy contracted less than previously estimated.

“In the race of pro-risk currencies, the euro is losing out based on its weak growth profile,” Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York, said in a telephone interview. “However, the market reaction to an aid request from Spain would be positive for the euro.”

Europe’s shared currency dropped 0.3 percent to $1.2838 at 11:31 a.m. New York time, reaching the lowest level since Sept. 12. The euro fell 0.4 percent to 99.68 yen, extending its run of declines to the longest since May 31. The yen added 0.1 percent to 77.66 per dollar.

Spain’s Debt

Spanish 10-year government bonds extended their advance as the government approved its budget for 2013, with yield slipping 11 basis points to 5.95 percent.

Implied volatility, which signals the expected pace of currency swings, for the currencies of Group of Seven nations fell to 7.88 percent. The gauge reached 7.75 percent on Sept. 13, its lowest level since October 2007, according to a JPMorgan Chase & Co. index. Lower volatility makes investments in currencies with higher benchmark lending rates more attractive because the risk in such trades is that market moves will erase profit.

The Australian dollar rebounded from a two-week low amid speculation China will act to support growth in the world’s biggest consumer of commodities.

The Aussie rose 0.5 percent to $1.0420. It yesterday touched $1.0329, the weakest since Sept. 11. The Aussie has gained 1 percent this month and 1.8 percent this quarter against the greenback.

Kiwi Gains

New Zealand’s dollar increased versus the majority of its major peers as the country’s business confidence rose to a four-month high in September as record-low interest rates boosted spending and the housing market, according to a survey.

The so-called kiwi advanced 0.6 percent to 82.95 U.S. cents. The kiwi has gained 3.3 percent versus the dollar this month, the most out of its major counterparts. It has risen 6.7 percent this year, the second-most out of peers.

The real is also on pace for the biggest quarterly decline out of its most-traded peers, having slipped 1.1 percent. The Brazilian currency has lost 8.3 percent versus the dollar in 2012.

The Mexican peso leads all 16 of the dollar’s biggest peers with a gain of 8.4 percent this year.

European Sentiment

An index of executive and consumer sentiment in the 17-nation euro area dropped to 85 from 86.1 in August, the European Commission in Brussels said today. Economists had forecast no change in the gauge, the median of 28 estimates in a Bloomberg News survey showed.

The euro is still on track for a 2.2 percent advance against the dollar this month, amid speculation that the European Central Bank will buy bonds from Spain and other euro-region nations to stem market turmoil. The ECB’s plan, announced by President Mario Draghi on Sept. 6, requires nations to request aid that would come with strict conditions attached.

“The focus is on Spain,” said Lutz Karpowitz, a senior foreign-exchange strategist at Commerzbank AG in Frankfurt. “There is a little bit of pressure on the euro, and we expect that to continue because the tensions remain. There is speculation that Spain may have to tap the rescue funds.”

Currency Forecasts

Analysts have raised their year-end estimates for the euro by one cent this month, to $1.27 from $1.26, according to analyst estimates compiled by Bloomberg. The revision comes amid optimism policy makers are working toward a solution for the debt crisis and after the Federal Reserve said on Sept. 13 it will buy $40 billion of mortgage-backed securities each month until the labor market improves.

“Rajoy may attempt to push through some harsh austerity measures today,” said Melinda Burgess, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in London. “Pressure is intensifying on Spain to ask for a bailout and if they took one that would be a positive for the euro.”

The Dollar Index fell 0.1 percent to 79.826 after reaching 80.012 yesterday, the most since Sept. 12.

Applications for jobless benefits decreased 26,000 to 359,000 in the week ended Sept. 22, the lowest since July, Labor Department figures showed today. Economists forecast 375,000 claims, according to the median estimate in a Bloomberg survey.

The pound climbed 0.2 percent to $1.6192 and advanced 0.3 percent to 79.42 pence per euro, after appreciating to 79.24 pence, the strongest level since Sept. 6.

U.K. gross domestic product fell 0.4 percent in the second quarter, instead of the 0.5 percent decline estimated last month, the Office for National Statistics said.

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