Euro Weakens Below $1.28 on Deadlocked Italy, Cyprus Concern

The euro fell to less than $1.28 for the first time in more than four months as a bailout for Cyprus and a political deadlock in Italy undermined demand for the region’s assets.

Europe’s shared currency weakened against all 16 of its major peers as demand fell at a sale of Italy’s bonds and the nation’s political parties remained at an impasse after last month’s elections. Cyprus is preparing details of the capital controls it will apply when banks reopen tomorrow while Swiss bank Pictet & Cie. said the crisis has “tarnished” the region’s appeal. The Dollar Index rose to the highest since August and the yen gained as investors sought haven assets.

“The banks are set to open tomorrow, so that’s an uncertainty to see how that’s going to go,” Fabian Eliasson, vice president of corporate foreign-exchange sales at Mizuho Financial Group Inc. in New York, said in a telephone interview. “I don’t think there’s any fundamental belief that this will topple the euro zone, when you’ve gone through the things you have.”

The euro dropped 0.6 percent to $1.2780 at 5 p.m. New York time, after touching the lowest level since Nov. 21. Europe’s shared currency declined 0.6 percent to 120.71 yen. The dollar was little changed at 94.46 yen.

Winners, Losers

Mexico’s peso has gained 3.6 percent to the greenback in the past month, the most of the dollar’s 16 most-traded peers, while South Africa’s rand has declined 2.6 percent. This quarter, the Mexican currency has rallied 4.2 percent and the rand has depreciated 8.5 percent.

Indonesia’s currency touched the strongest level versus the dollar since March 19 amid concern the government’s plan to adjust fuel subsidies will quicken inflation. The rupiah gained 0.1 percent to 9,725 to the greenback.

Cyprus may announce what type of capital controls it plans to implement today as its leaders seek to prevent cash outflows when the nation’s banks reopen tomorrow. Lenders have been closed since a plan by the European Union to force losses on some bondholders and depositors in exchange for a 10 billion-euro bailout. European governments vowed that the tax on bank accounts won’t set a precedent for future rescues.

‘Damaging Consequences’

“The Cypriot program is not a template, but measures are tailor-made to the very exceptional Cypriot situation,” according to a document agreed yesterday by representatives of euro-zone finance ministries and intended as a guide for explaining the decision to the public.

“The Cypriot crisis resolution has potentially damaging consequences for the euro area,” Jean-Pierre Durante, head of financial-market research at Pictet, said in an e-mail today. It has “tarnished attractiveness of the euro area as a place to invest. This could translate into downward pressure on the euro.”

Italy auctioned a five-year bond to yield 3.65 percent, the highest at a sale since Oct. 30. It also sold 3 billion euros of 10-year bonds. Investors bid for 1.22 times the amount of five-year notes sold, down from 1.61 times last month. The so-called bid-to-cover ratio for the 10-year debt was 1.33, compared with 1.65 in February.

Economic Confidence

Europe’s shared currency also declined as a report showed economic confidence in the euro area fell in March.

An index of executive and consumer sentiment decreased to 90 from 91.1 in February, the European Commission in Brussels said today. Economists had forecast a drop to 90.5, according to the median of 30 estimates in a Bloomberg News survey.

The euro has weakened 0.7 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen slid 7.3 percent, the biggest drop, and the dollar gained 3 percent.

“A bit of pessimism out of Italy is certainly part of the story and obviously the Cypriot reverberations continue,” Eric Lascelles, chief economist in Toronto for RBC Global Asset Management, which oversees $270 billion, said in a telephone interview. “There is a general level of wariness. It’s not that there’s a likely disaster in the next few days. It’s more along the lines that Europe is materially riskier than previously imagined and so exposure to European investment is riskier than first thought.”

Dollar Measure

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trade partners, climbed 0.4 percent to 83.207, and reached the highest since Aug. 3. It’s poised for a 4.4 percent gain in the first quarter.

“The U.S. dollar continues to show a firm profile,” Marc Chandler, New York-based global head of currency strategy at Brown Brothers Harriman & Co., wrote in an e-mailed note to clients. “European events dominate investors’ concerns.”

Sweden’s retail sales climbed 1 percent in February, beating the 0.2 percent estimate in a survey of economists, data from the Swedish statistics agency showed. The nation’s consumer confidence index rose to 2.8 in March from minus 1 the previous month, a separate report showed.

The krona advanced 0.2 percent to 8.3304 per euro.

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