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Euro Trades Near 4-Month Low as Cyprus Spurs Debt Crisis Concern

The euro traded 0.3 percent from a four-month low as a Cyprus bailout plan to tax bank depositors cast doubt on the safety of financial assets in the region.

The 17-nation currency held its biggest decline in more than eight months ahead of debt auctions in Italy where lawmakers are still trying to form a government after inconclusive elections last month. The yen fell against all 16 major peers as Bank of Japan Governor Haruhiko Kuroda told parliament he will seek to end deflation.

“The market was spooked by the possibility that Cyprus won’t be the only time bank deposit holders are forced to share the cost of a bailout,” said Yuki Sakasai, a foreign-exchange strategist at Barclays Plc in New York. “With the political risk in Italy continuing, it will be hard for the euro to make any headway.”

The euro was little changed at $1.2864 as of 10:42 a.m. in Tokyo from yesterday, when it tumbled 1.1 percent, the most since July 5. The single currency added 0.3 percent to 121.45 yen following a 1.4 percent slide. The yen weakened 0.3 percent to 94.41 per dollar from yesterday, when it reached 93.53, the strongest since March 6.

Cyprus agreed to the outlines of an aid deal that EU officials said imposes losses of as much as 40 percent on uninsured depositors at Bank of Cyprus Plc, and sees Cyprus Popular Bank Pcl wound down, wiping out bondholders.

Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of 17 euro finance ministers, said imposing losses on depositors and bondholders must be part of the bailout toolkit.

Italian Auctions

Italy is scheduled to sell 6-month bills today and bonds due in 2018 and 2023 tomorrow. The euro area’s fourth-biggest economy auctioned 2.8 billion euros ($3.6 billion) of 2014 zero-coupon bonds yesterday at a yield of 1.746 percent, the highest since Dec. 27.

Italy’s Democratic Party leader Pier Luigi Bersani has two days left to overcome a shortfall of support in parliament, after President Giorgio Napolitano gave him a mandate on March 22 to try to form a government. Bersani will meet adversary Silvio Berlusconi’s deputies at the People of Liberty party today, and seek to overcome years of bad blood.

The euro has fallen 1.1 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The U.S. dollar has gained 0.5 percent, while the yen has weakened 2.3 percent.

Over six months, expectations for additional stimulus in Japan have pushed the yen down more than 17 percent, the most among the currencies on the indexes.

Kuroda Comments

New Bank of Japan Governor Haruhiko Kuroda told lawmakers today he envisages two years to achieve a 2 percent inflation target. He said he’ll consider extending bond maturities for the bank’s asset purchase fund.

“The speculative community has driven dollar-yen higher,” said Jonathan Cavenagh, a currency strategist in Singapore at Westpac Banking Corp. “The market is looking for hints at what Kuroda’s going to do. The bar is set quite high in terms of what he’s going to have to deliver to give dollar-yen a significant boost.”

The BOJ currently buys government bonds with maturities of up to three years through its 76 trillion-yen ($802 billion) asset-purchase program.

Kuroda said policy specifics will be discussed at the BOJ board meeting, scheduled for April 3-4.

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