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Euro Weakens as Bond Yields Rise on Political Concern

The euro fell the most in a month against the dollar as Italian and Spanish bonds slumped amid political turmoil, damping demand for the shared currency.

The 17-nation currency dropped versus all but one of its 16 major peers as Spanish Prime Minister Mariano Rajoy faced calls to resign after newspaper reports alleged he accepted illegal cash payments. A poll showed former Italy Premier Silvio Berlusconi closed the gap on front-runner Pier Luigi Bersani even as he appeals a four-year prison sentence for tax fraud. The yen weakened beyond 93 per dollar for the first time since May 2010. European Central Bank policy makers meet this week.

“The euro obviously has come off quite sharply,” Fabian Eliasson, vice president of corporate foreign-exchange sales at Mizuho Financial Group Inc. in New York, said in a telephone interview. “I would attribute that to some negative headlines out of Europe. Obviously, things can’t go up forever.”

The euro dropped 0.9 percent to $1.3514 at 5 p.m. in New York after falling 1 percent, the biggest decline since Jan. 3. The common currency reached $1.3711 on Feb. 1, the highest level since Nov. 14, 2011. The euro slipped 1.4 percent to 124.84 yen. The yen rose 0.4 percent to 92.38 per dollar after sliding to 93.18, the weakest level since May 13, 2010.

Rand, Ringgit

The rand lost 0.9 percent to the dollar as South Africa posted a trade gap of 32 billion rand ($3.6 billion) in the fourth quarter amid slowing global growth and mining strikes that curbed exports. The currency weakened to 8.9150 to the greenback.

Malaysia’s ringgit appreciated the most in a month as recent losses were judged excessive. It fell last week the most against the dollar in 16 months on speculation Prime Minister Najib Razak will call an early election. The ringgit advanced 0.7 percent to 3.0950 per dollar.

South Korea’s won rose the most in 14 months against the dollar after U.S. and Chinese reports added to signs of recovery in the world’s largest economies and a Bank of Korea board member said it’s too early for any central bank response to the yen’s slide against the won. The won appreciated 1.2 percent to 1,084.78 per dollar.

The ECB, which has held its main refinancing rate at 0.75 percent since July, will make no change at its next policy decision on Feb. 7, according to the median forecast of 58 economists surveyed by Bloomberg. Central-bank President Mario Draghi may make more dovish remarks at the meeting without the central bank altering policy, according to analysts.

‘Aggressive Tactics’

“If we enter a new macroeconomic environment with lower growth and unemployment rising, policy leaders will resort to more aggressive tactics,” Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York, said in a Bloomberg Radio interview with Tom Keene. “We’re not at that point yet.”

Spain’s 10-year bond yield climbed to 5.44 percent, the highest since Dec. 12, as Rajoy said the allegations published in Spain’s biggest newspaper El Pais are unfounded. He met with German Chancellor Angela Merkel in Berlin today.

Italian 10-year yields rose as high as 4.49 percent, with the additional yield investors demand to hold the securities instead of German bunds increasing for a fourth day, after Prime Minister Mario Monti said the spread may widen if Berlusconi, also standing trial on charges he paid a minor for sex, is elected this month.

‘Convenient Excuse’

Political uncertainty “provided a convenient excuse for investors to take some profit off the table,” Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, said in a telephone interview. “The broader theme for the euro is caution ahead of the ECB meeting this week.”

Barclays Plc raised its forecasts for the euro against the dollar to take into account last week’s gains. The euro will drop to $1.32 in six months and $1.28 in a year, from previous estimates of $1.26 and $1.22, strategists Raghav Subbarao and Guillermo Felices in London wrote today in a note to clients.

The euro will fall to $1.30 by year-end, according to the median of 60 estimates compiled by Bloomberg. Implied volatility from options trading shows the chance of it ending the year below that level is 28 percent.

The yen rose against the dollar after a record 12 straight weeks of declines as Prime Minister Shinzo Abe’s administration presses the central bank to ease monetary policy further to beat deflation.

Finance Minister Taro Aso said yesterday the government is imitating his Depression-era predecessor, Korekiyo Takahashi, who told the Bank of Japan to underwrite government debt to fund deficit spending. “We can only learn from history,” he said.

The yen tumbled 16 percent over the past three months, the biggest decline among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 4.5 percent and the dollar dropped 1.7 percent.

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