The euro dropped to a one-week low against the yen after Standard & Poor’s cut Spain’s credit rating and the nation’s unemployment rate jumped, adding to concern the region’s debt crisis is worsening.
The yen strengthened against all of its major counterparts as investors sought safer assets even after the Bank of Japan (8301) expanded its asset-purchase program. The euro erased losses against the dollar after Italy raised 5.95 billion euros ($7.87 billion) through a debt. The dollar weakened before a U.S. report forecast to show growth in the world’s largest economy slowed last quarter.
“There is definitely an impact from the downgrade on the euro,” said Geoff Kendrick, head of European currency strategy at Nomura International Plc in London. “Spain is the main story in Europe now.”
The euro fell 0.4 percent to 106.70 yen at 6:58 a.m. New York time after dropping to 106.16, the lowest level since April 18. The shared currency was little changed at $1.3227 after weakening as much as 0.5 percent. The euro has declined 3.5 percent versus the yen this month, and 0.9 percent against the dollar. The yen gained 0.4 percent to 80.69 per dollar.
S&P cut Spain’s long-term credit rating by two steps to BBB+ from A late yesterday, saying the outlook is negative as the recession undermines efforts to trim the budget deficit.
“Spain’s budget trajectory will likely deteriorate against a background of economic contraction,” S&P said. “We see an increasing likelihood that Spain’s government will need to provide further fiscal support to the banking sector.”
The jobless rate increased to an 18-year high of 24.4 percent in the first quarter from 22.9 percent in the previous three months, the National Statistics Institute said in Madrid.
Spain’s 10-year bond yield climbed to as high as 6 percent today, from this year’s low of 4.83 percent on March 1, as Prime Minister Mariano Rajoy struggled to convince investors he can control public finances amid soaring unemployment and a shrinking economy.
The yen strengthened the most against higher-yielding currencies such as the South African rand and Swedish krona as investors sought safer assets.
Japan’s currency weakened earlier versus the dollar after the central bank expanded its plan for government-bond purchases by 10 trillion yen to help support the economy.
The BOJ said it will boost its asset-purchase fund to 40 trillion yen by June 2013, compared with the previous target of 30 trillion yen by year-end. A separate central-bank program providing funds to banks was pared by 5 trillion yen amid lackluster demand for loans.
“This was as expected, disappointing market expectations and causing” the yen to weaken against the dollar, Callum Henderson, global head of currency research at Standard Chartered Plc in Singapore, wrote in a note to clients.
The dollar dropped against 12 of its 16 major counterparts before the Commerce Department releases its gross-domestic- product report for the first quarter.
GDP growth slowed to a 2.5 percent annual rate from 3 percent in the previous three months, according to economists surveyed by Bloomberg News.
“The market got a little sucked in early on in terms of euro-dollar lower on the downgrade” of Spain, said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “But people are likely to be reluctant of going short into the GDP data.” A short position is a bet an asset will decline.
The dollar is losing momentum against the yen after it repeatedly failed to overcome the resistance offered by the 81.78 level, UBS AG said, citing trading patterns.
The level is the 38.2 percent Fibonacci retracement of the dollar’s decline from a high of 84.18 yen on March 15 to a low of 80.30 yen on April 16.
The failure of the dollar to break through the level “is now turning momentum lower within what is still a bearish trending condition,” Richard Adcock, head of fixed-income technical strategy in London, wrote in a report yesterday.
Resistance refers an area where order to sell may be clustered. Fibonacci analysis is based on the theory prices rise or fall by certain percentages after reaching a new high or low.
To contact the reporters on this story: David Goodman in London at firstname.lastname@example.org; Monami Yui in Tokyo at email@example.com
To contact the editor responsible for this story: Daniel Tilles at firstname.lastname@example.org