Dollar Index Reaches Month High After Spain Downgrade

Euro Weakens Against Most Peers After S&P Lowers Spain’s Rating
Europe’s shared currency slid to as low as $1.2826, a level unseen since Oct. 1, and traded at $1.2837 as of 10:53 a.m. in Tokyo, down 0.3 percent from yesterday. Photographer: Simon Dawson/Bloomberg

The euro weakened for a fourth day against the yen after Standard & Poor’s yesterday cut Spain’s sovereign-debt rating to one level above junk.

The 17-member currency weakened against 13 of its 16 major counterparts before Italy sells bonds today amid concern Europe’s debt crisis is deepening. The Dollar Index touched a one-month high as demand for the greenback as a haven rose. Australia’s dollar strengthened after data showed the nation added the most workers since May. The yen rose versus the majority of its peers as Asian stocks declined.

“I can see further weakness to the euro from here,” said Imre Speizer, a strategist in Auckland at Westpac Banking Corp., Australia’s second-largest lender. “If the fiscal outlook is much worse in Spain, it could fall to junk status. In the short term, it looks like the dollar is going higher,”

The euro declined 0.2 percent to 100.50 yen at 9:33 a.m. London time. It was little changed at $1.2879, after weakening as much as 0.4 percent to $1.2826, the lowest since Oct. 1. The Japanese currency gained 0.2 percent to 78.04 per dollar after reaching 77.95, the strongest level since Oct. 1.

Dollar Index

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trade partners, gained 0.1 percent to 79.971, after climbing to as high as 80.205, the most since Sept. 11.

The MSCI Asia Pacific Index of shares slid 0.1 percent, extending declines to a fourth day.

S&P lowered Spain’s rating by two levels to BBB- from BBB+ and assigned a negative outlook for its debt. The country’s deepening recession is limiting the government’s policy options, the New York-based ratings company said in a statement.

Moody’s Investors Service on Aug. 30 said Spain’s credit rating remains on review for a possible downgrade from Baa3, the company’s lowest investment grade.

Spain’s 10-year bond yields have fallen from the euro-era record of 7.75 percent reached in July to as low as 5.55 percent since European Central Bank President Mario Draghi said the ECB is ready to do “whatever it takes” to preserve the euro. While the central bank unveiled an unlimited debt-purchase program on Sept. 6 to contain a surge in government borrowing costs, Spain’s Prime Minister Mariano Rajoy has held off on a decision about whether to request ECB and European Union aid.

Spain’s 10-year yield rose seven basis points, or 0.07 percentage point, to 5.88 percent.

Moody’s Action

“Because of S&P’s downgrade, people can’t help thinking about Moody’s next action,” said Daisuke Karakama, a market economist in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan’s third-largest banking group by market value. “Rating actions will be another catalyst for Spain to seek rescue.”

Italy will sell as much as six billion euros of government securities maturing in 2015, 2016, 2018 and 2025 today.

The euro appreciated 1.7 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes that tracked 10 developed-nation currencies. The dollar fell 3.7 percent, and the yen lost 1.3 percent. EU leaders will hold a two-day summit in Brussels starting Oct. 18.

‘Some Progress’

“We may see some progress in Spain’s request for rescue toward the European Union summit next week,” said Ken Takahashi, assistant vice president of global markets in New York at Sumitomo Mitsui Trust Bank Ltd. “The downside risk to the euro is limited until that time.”

In Australia, the statistics bureau said today the number of people employed climbed 14,500 in September, almost three times the median estimate from economists surveyed by Bloomberg News. The jobless rate rose to 5.4 percent, the highest since April 2010, from 5.1 percent the prior month.

“The rise in the unemployment rate comes down to a rising participation rate,” Todd Elmer, head of Group-of-10 foreign-exchange strategy for Asia excluding Japan at Citigroup Inc. in Singapore, wrote in a report today. “Australia’s dollar may gain further” as the market digests the details of the report.

Australia’s dollar climbed 0.4 percent to $1.0271 and touched $1.0287, the strongest since Oct. 2.

The Bank of Korea today cut borrowing costs for the second time this year, lowering the benchmark rate to 2.75 percent from 3 percent. The won was little changed at 1,114.35 per dollar.

The Dollar Index may test its resistance area that includes the 200-day moving average and the 38.2 percent retracement from the July 24 high of 84.1 to the Sept. 14 low of 78.601, according to JPMorgan Chase & Co. The “short-term corrective phase” continues to develop after the September low, Niall O’Connor, a New York-based technical analyst at JPMorgan, wrote in a research note yesterday.

The 200-day moving average was at 80.719 today, while the 38.2 percent retracement stood at 80.702, data compiled by Bloomberg show. Resistance refers to an area on a chart where orders to sell may be clustered.

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