Bloomberg News

Euro Snaps Gains Versus Dollar as European Output Slides

June 21, 2012

Euro Halts Gain Before Spain Bond Sale, Ministers Meet on Crisis

Spain is scheduled to auction bonds today maturing 2014, 2015 and 2017. The nation held its first debt auction earlier this week since becoming the fourth euro member to seek a bailout earlier this month.

The euro snapped two days of gains against the dollar as a report showed euro-area services and manufacturing output contracted in June, adding to signs Europe’s debt crisis is blunting economic growth.

New Zealand’s dollar strengthened after a report showed the nation’s economy grew at the fastest pace in five years last quarter. A composite index based on a survey of purchasing managers in services and manufacturing in the 17-nation euro area was below the 50 level that separates contraction from expansion for a fifth month.

“The weak PMI data we’ve seen from Europe is weighing on the euro,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “The growth outlook is coming into question. There is plenty to put the euro back under pressure.”

The 17-nation currency slid 0.1 percent to $1.2693 at 7:40 a.m. New York time. It reached $1.2748 on June 18, the most since May 22. The shared currency gained 0.5 percent to 101.54 yen. The dollar strengthened 0.6 percent to 79.99 yen.

The euro-area composite index held at 46, the same reading as in May, London-based Markit Economics said today in an initial estimate. That matches the lowest since June 2009. Economists had forecast a drop to 45.5, the median of 15 estimates in a Bloomberg News survey showed.

“Flash euro-zone PMI releases today will likely restrain the euro,” Mitul Kotecha, head of global currency strategy in Hong Kong at Credit Agricole Corporate & Investment Bank, wrote in a research note today before the announcement. “The data will put further pressure on the European Central Bank to cut interest rates.”

European Summit

The ECB earlier this month held its benchmark interest rate at a record low of 1 percent, while President Mario Draghi said “a few” policy makers called for a cut. The central bank’s next rates decision is scheduled for July 5.

European finance ministers are set to meet in Luxembourg today to discuss the currency union’s financial woes.

The euro is down from this year’s high of $1.3487 on Feb. 24 and has depreciated about 6.7 percent in the past 12 months, according to Bloomberg Correlation-Weighted Indexes that measure 10 developed-market currencies.

Spain sold 2.2 billion euros of debt maturing between 2014 and 2017, the Bank of Spain said, compared with a maximum target of 2 billion euros set for the auction.

Spanish Sale

The average yield on notes maturing in 2014 was 4.706 percent, compared with 2.069 percent when they were last sold in March.

Spanish 10-year yields reached 7.29 percent on June 18, the most in the euro era and above the 7 percent level that pushed Greece, Ireland and Portugal to request rescue packages.

“As long as Spain’s debt problem stays with us, my bearish view on the euro won’t change,” said Marito Ueda, senior managing director in Tokyo at FX Prime Corp. (8711), a currency-margin company. “Whether Spain can resolve its debt problem has yet to become clear, so anxieties continue to prevail.”

Demand for the dollar was tempered after the Federal Reserve said yesterday it stood ready to implement further stimulus following the announcement of an extension to its program to replace short-term bonds with longer-term debt.

Fed Policy

The Fed said it will expand its so-called Operation Twist program, which seeks to lower borrowing costs by extending the average maturity of the securities in the central bank’s portfolio, by $267 billion through the end of the year. Officials also cut their estimates for 2012 growth after last month’s slowdown in hiring and said there will be little progress on unemployment during the rest of the year.

The Fed Bank of Philadelphia’s general economic index was at zero this month, according to the median economist estimate in a Bloomberg survey before a report due today. The reading was minus 5.8 in May, the lowest since September and signaling contraction.

The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, was little changed at 81.524.

“The slowdown in the U.S. economy is more than I have expected, and it’s damping people’s willingness to buy the dollar,” said FX Prime’s Ueda.

New Zealand’s dollar rose after a report showed gross domestic product increased 1.1 percent in the three months ended March 31 from the previous quarter, when it expanded a revised 0.4 percent, Statistics New Zealand said.

The so-called kiwi climbed 0.4 percent to 79.96 U.S. cents, after reaching 80.17 cents, the strongest level since May 4.

To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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