The euro fell to the lowest level since July 2010 against the dollar as investor concern about Spain’s ability to recapitalize troubled banks increased, boosting bets the union’s debt crisis is worsening.
The 17-nation currency dropped below $1.25 for the second time this month after Egan-Jones Ratings Co. reduced its credit rating for Spain to B from Bb-. The euro fell against most of its major counterparts as Spanish officials debated how to fund a bailout of the Bankia group. The yen gained against the majority of its most-traded peers amid increased demand for haven assets. Sweden’s krona and the Norwegian krone weakened.
“It’s all about what happens with Spain and their banks, and what could be the scenario in terms of how much money they ask for,” said Mary Nicola, a currency strategist at BNP Paribas SA in New York. “But there’s still that Greek shadow.”
The euro fell 0.3 percent to $1.2503 at 5 p.m. New York time after touching $1.2461, the lowest since July 1, 2010. It has lost 5.6 percent in May, the most since September. The euro declined 0.3 percent to 99.39 yen and reached 98.94 yen, falling below 99 for the first time since Jan. 23. It has dropped 6 percent this month. The yen was little changed at 79.49 per dollar.
The yen remained higher against most of its counterparts after Bank of Japan (8301) Deputy Governor Hirohide Yamaguchi said the domestic economy is in better shape than expected and new easing may not be needed to meet the central bank’s inflation target, the Nikkei newspaper reported, citing an interview.
The euro’s move below $1.25 triggered further losses in the euro as technical-support levels were taken out.
“Since we broke $1.30, we have not seen any significant bounces so that short sellers have at no point been squeezed,” said Kit Juckes, head of foreign-exchange research at Societe Generale SA in London. “Hence, while speculative positions are reported to be huge and the consensus is very bearish indeed, the euro’s steady decline continues.”
Short euro positions, or bets the currency will fall against the dollar, reached a record high in the week ended May 22, according to Commodity Futures Trading Commission data. Futures traders increased their speculative euro short positions to 195,361 contracts, compared with 173,869 the prior week.
Sweden’s krona was the worst performer among the 16 major currencies tracked by Bloomberg, losing 0.5 percent to 7.1990 per dollar. Norway’s krone dropped 0.2 percent to 6.0199.
Spain backtracked on a plan to use government debt instead of cash to bailout BFA-Bankia, the nation’s third-largest lender, as Prime Minister Mariano Rajoy struggles to shore up the nation’s lenders without overburdening public finances.
‘Degree of Uncertainty’
An Economy Ministry spokesman said yesterday that the government was considering using an injection of Treasury debt instead of cash to recapitalize Bankia, as laid out in legislation approved in February. Spanish bond yields rose and investors criticized the idea, which the spokesman, speaking anonymously under ministry policy, said today had become a “marginal” option for the 19 billion-euro ($24 billion) rescue.
“We’re waiting to see what the ECB involvement is within recent talk of a Spanish bank bailout,” said Brian Kim, a currency strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc. “Any of the euro movements we’re seeing now are not necessarily too much of a breakout, given the degree of uncertainty that’s overhanging.”
The extra yield investors demand to hold Spain’s 10-year bonds instead of similar-maturity German notes soared to 5.16 percentage points today, the most since 1995, data compiled by Bloomberg showed.
Standard & Poor’s cut Spain’s credit rating on April 26 to BBB+ from A, saying there is an increasing likelihood the government will need to provide further fiscal support to the banking sector.
“Because Spain has a big share in the euro region’s economy, a further widening of the Spain-Germany yield spread will have a substantial negative impact over markets,” said Tohru Sasaki, head of Japan rates and foreign-exchange research in Tokyo at JPMorgan Chase & Co. “The selloff of Spain’s bonds is generating risk-off sentiment,” supporting the dollar.
The pound approached a three-and-a-half-year high against the euro amid the monetary union turmoil. It strengthened as much as 0.2 percent to 79.82 pence per euro after reaching 79.51 pence on May 16, the strongest level since November 2008. Sterling has appreciated 5 percent this year.
Investors should bet the Canadian dollar will slide to its weakest level since October as commodities drop below 3 1/2-year support levels, according to Bank of America Corp.
The Thomson Reuters/Jefferies CRB Index (CRY) of raw materials fell below 295 on May 8, a 42-month trend line, and reached 280.34 today, the lowest level since September 2010. It may decline to 265 and 257, according to MacNeil Curry, head of foreign-exchange and interest-rates technical strategy at Bank of America Merrill Lynch in New York. Raw materials account for half of Canada’s export revenue.
Curry’s firm entered a Canadian-dollar bet at C$1.0053 per U.S. dollar on May 15, with a target of it weakening to C$1.0528, he wrote to clients today. It last closed weaker than that on Oct. 3. The firm will exit the trade if the Canadian currency, known as the loonie for the image of the aquatic bird on the C$1 coin, gains to 99.50 cents. The loonie gained 0.2 percent to C$1.0221.
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