Bloomberg News

Euro Falls Below $1.30 as Italy Finance Costs Rise; Krone Slumps

December 15, 2011

Dec. 14 (Bloomberg) -- The euro fell below $1.30 for the first time since January as signs of increased funding stress in Europe damped investor appetite for the shared currency.

The 17-nation euro declined to a 10-week low against the yen as Italian borrowing costs increased at a debt auction and Spanish banks’ borrowings from the European Central Bank climbed by the most in a year. Norway’s krone weakened after the Norges Bank cut interest rates for the first time since 2009. The pound was one of the the biggest gainer against the euro among the major currencies as investors sought protection from the crisis.

“There is a major funding issue,” Jens Nordvig, a managing director of currency research in New York at Nomura Holdings Inc., said today in a “Bloomberg on the Economy” radio interview with Sara Eisen. “The few measures that were taken on the fiscal side were very long-term measures that really didn’t provide any comfort for the short-term liquidity issue. That’s why the news has seen the euro significantly lower.”

The euro slipped 0.4 percent to $1.2983 at 5 p.m. New York time, after depreciating to $1.2946, the weakest level since Jan. 11. The shared currency dropped 0.3 percent to 101.36 yen after sliding to 101.10, the lowest since Oct. 4. The dollar rose 0.1 percent to 78.07 yen.

The Standard & Poor’s 500 Index fell 1.1 percent and the Thomson Reuters/Jefferies CRB Index of raw materials slid 3.4 percent.

Reverse Pressure

The euro’s 14-day relative strength index versus the dollar weakened to 28.7 today, the lowest level since Oct. 3. A reading below 30 signals that an asset may be oversold and due to reverse direction.

Norges Bank cut its main interest rate to 1.75 percent from 2.25 percent, reversing part of a rate-increase cycle that started in October 2009 as the euro debt crisis threatens growth. The median estimate of 17 economists in a Bloomberg News survey had predicted a cut to 2 percent.

The krone was 0.8 percent weaker at 5.9819 per dollar and fell 0.3 percent to 7.7659 per euro after strengthening 0.2 percent.

The pound rose for a third day against the euro, the longest run in a month, as stock declines spurred demand for the perceived safety of the British currency.

U.K. Prime Minister David Cameron refused to back the 27- nation European Union pact at the talks, citing the need for ironclad guarantees of a British veto right over future financial regulations. Euro users are seeking to enshrine the debt rules in a revised accord that leaves out the U.K.

‘Semi-Safe Haven’

“The pound still trades as a semi-safe haven,” said Elsa Lignos, a currency strategist at RBC Europe Ltd. in London. “On days like today, when risk appetite is under pressure, the pound will benefit.”

Sterling gained 0.3 percent to 83.94 pence per euro.

The cost for European banks to borrow in dollars rose for a fifth day to the highest in two weeks, according to money-market indicators.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 147 basis points below the euro interbank offered rate, from 141 basis points yesterday. The gap has widened 16 basis points since the ECB and five other central banks lowered interest rates on overnight dollar borrowing costs on Nov. 30 in an effort to ease funding stress.

Italy sold 3 billion euros ($3.9 billion) of five-year bonds, the maximum target for the auction, and borrowing costs rose to the highest since 1997 as Parliament prepared to approve a 30 billion-euro emergency budget plan. The Treasury sold the bonds to yield 6.47 percent, up from 6.29 percent at the prior auction on Nov. 14.

Spain’s Borrowing

Spanish lenders borrowed an average 98 billion euros from the ECB last month, the most since September 2010, according to data published by the Bank of Spain on its website. The increase was the biggest since June 2010 in absolute terms, signaling banks are struggling to access other sources of finance.

European leaders unveiled a blueprint last week for a closer fiscal accord to save the currency. They agreed to move up the creation of the permanent European Stability Mechanism and said that by March the EU will reassess plans to cap the overall lending of the ESM and the temporary rescue fund at 500 billion euros. German Chancellor Angela Merkel yesterday reiterated her rejection of increasing the upper limit of funding for the funds.

Euro Concern

“Yields start to rise again and the euro gets bashed,” said David Watt, senior currency strategist at Royal Bank of Canada’s RBC Capital unit in Toronto. “We’re not seeing the developments unfold that show they want to put an end to the crisis now.”

The Dollar Index, which IntercontinentalExchange Inc. uses to track the U.S. currency against those of six trading partners, rose 0.4 percent to 80.534 and touched 80.730, the highest since Jan. 12.

The Federal Reserve’s policy-setting panel, which met in Washington yesterday, said the economy “has been expanding moderately,” compared with the Nov. 2 assessment that growth “strengthened somewhat.” The central bank also said “strains in global financial markets continue to pose significant downside risks to the economic outlook.” It refrained from taking new action to lower borrowing costs.

The dollar has appreciated 2.4 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The euro slipped 0.6 percent and the yen gained 5.2 percent.

--Editors: Paul Cox, Dave Liedtka

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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