Mon Apr 16, 2012 11:39am EDT
* Euro falls to 2-month low vs dollar, yen * Stops cited below $1.2970, tech support at $1.2955 * Spanish bonds in focus, yields jump above 6 percent * China yuan band widening having minimal impact By Gertrude Chavez-Dreyfuss NEW YORK, April 16 (Reuters) - The euro hit a two-month low against the dollar and yen and a 1-1/2-year trough versus sterling on Monday as a rise the yield on Spain's government bonds signaled fresh worries about the country's fragile economic state. Spain's 10-year government bond yields rose above 6 percent for the first time this year as investors worried that about the country's ablity to contain its budget deficit, and the cost of insuring its debt hit a record high. Commodities-linked currencies such as the New Zealand and Australian dollars slipped, while the yen rose to a 1-1/2-month high against the U.S. dollar. Stronger-than-expected U.S. retail sales for March, however, helped the dollar trim some of its losses against the Japanese currency. Spanish stocks and banking shares came under pressure over the worries on Spain's debt load and as the effects of the European Central Bank's 1 trillion euro cash injection waned. "The price action suggests relative unease with what's happening in Spain. If you notice, the euro has moved in lock step with Spanish yields," said Vassili Serebriakov, senior currency strategist, at Wells Fargo in New York. In midday New York trading, the euro dropped to a two-month trough of $1.2993 and below reported options barriers at $1.30. The euro last changed hands at $1.3066, down 0.1 percent. Traders cited selling by Asian investors before reported demand from sovereign investors helped the euro pare losses. The euro in late morning trading pared losses on demand from corporates at the 11 a.m. EDT fixing in London. News that ratings agency Fitch is not currently considering any action on Italy, the euro zone's third-largest economy and one of key concern because of its debt load, also helped the euro cut losses. Fitch said Italy's budget measures are "credible" and consistent with a gradual reduction of its debt. Investors will also focus on Spain's auction of two-year and 10-year bonds on Thursday after selling short-dated bills on Tuesday. Any sign of 10-year yields heading closer to the 7 percent level that is regarded as unsustainable could prompt further euro weakness. "We're also in the midst of a global slowdown and that's affecting the euro," said Sebastien Galy, senior currency strategist, at Societe Generale in New York. He added that in a global slowdown, those affected are countries with huge fiscal deficits because that increases the pressure for more monetary easing. Stop-loss euro sell orders were reported below $1.2970, but near-term support was seen around $1.2955, the 61.8 percent retracement of the euro's climb from a low around $1.2624 in January to this year's high of $1.3487. Even so, some strategists said the rapid appearance of buyers below $1.30 meant the euro was unlikely to test the January 2012 low this week. In the options market, demand to protect against further euro weakness increased as one-month risk-reversals , an indication of investors' expectations for a currency to rise or fall, worsened from last week. The rapid erosion in investor confidence has put the spotlight on the ECB. Many market players expect policymakers to revive purchases in the secondary market of bonds of southern European countries such as Spain to stem rising yields, while some are hoping for a fresh infusion of low-rate funding. SOLID U.S. RETAIL SALES The dollar fell against the yen, falling to 80.31 yen, its lowest since Feb. 29. It was last at 80.40 yen, down 0.6 percent, trimming losses after the U.S. Commerce Department reported that retail sales rose 0.8 percent in March, more than expected, despite high gasoline prices.. Noting that all the components of the retail sales data "far exceeded market expectations, Omer Esiner, chief market analyst, at Commonwealth Foreign Exchange in Washington, said, "I think it's a clear sign that U.S. consumer spending remains strong. "On balance I think it's the latest sign that the U.S. economy is outpacing a lot of its major counterparts," he added The euro also fell against the yen to a two-month low of 104.61 and was last at 105.08 yen, down 0.6 percent. Against sterling, the euro fell to 82.10 pence, its lowest level since September 2010; by midday, it was 0.1 percent lower at 82.45 pence. Commodity currencies were under pressure as well with the Australian dollar falling for a second straight trading day and was last at US$1.0350, while the New Zealand dollar was down 0.3 percent at US$0.8193. Oil and metal prices, in addition to suffering from worries about Spain, were also hit by signs of slowing demand from China. News over the weekend that China had doubled the yuan's daily trading band against the dollar to 1 percent had limited impact on major currencies. Some analysts said Beijing's decision could eventually be positive for risk sentiment, as Chinese authorities would not push ahead with such financial reforms if they were not confident of avoiding a hard economic landing. Overall the move was seen as unlikely to alter market expectations of gradual yuan appreciation of around 2 to 3 percent this year. The yuan weakened on the first day of trading after the wider band was adopted.
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