Mon Apr 16, 2012 9:35am EDT
* Euro falls to 2-month low vs dollar, yen, 19 month-low vs pound * Stops cited below $1.2970, tech support around $1.2955 * Spanish bonds in focus, 10-year yields jump above 6 percent * China yuan band widening having minimal impact By Gertrude Chavez-Dreyfuss NEW YORK, April 16 (Reuters) - The euro weakened broadly on Monday, hitting a two-month low against the dollar and the yen and a 1-1/2-year trough versus sterling, weighed down by worries about the Spanish economy's fragile state. Financial market sentiment in the euro zone was on edge Spain's 10-year government bond yields rose above 6 percent for the first time this year 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. A stronger-than-expected U.S. retail sales report for March, however, helped the dollar trim some of its losses against the Japanese currency. Spanish stocks and banking shares came under pressure as the effects of the European Central Bank's one trillion euro cash injection waned and investors fretted that Spain would struggle to contain its budget deficit. "Anytime we see bond yields above 6 percent is worrying because it means the country is in an unsustainable fiscal path," said Sebastien Galy, senior currency strategist, at Societe Generale in New York. "We're also in the midst of a global slowdown and that's affecting the euro." Galy added that in a global slowdown, those affected are countries with huge fisal deficits because that increases the pressure for more monetary easing. In early 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 $1.3045, down 0.2 percent. Traders cited selling by Asian investors before reported demand from sovereign investors helped the euro to pare losses. "Pressure is building up on the euro with concerns over Spain dominant," said Jane Foley, senior currency strategist at Rabobank in London. "The focus will be on Spanish bond issuance this week and while the euro is holding around $1.30, the question is how long can it be supported around these levels." Investors will 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. 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 80.45 yen, its lowest since February 29. It was last at 80.74 yen down 0.2 percent, trimming losses after a solid retail sales report, which showed a 0.8 percent rise in March despite high gasoline prices.. "All of (the) components (of the retail sales data) far exceeded market expectations and I think it's a clear sign that U.S. consumer spending remains strong," said Omer Esiner, chief market analyst, at Commonwealth Foreign Exchange in Washington. "On balance I think it's the latest sign here that the U.S. economy is outpacing a lot of its major counterparts." The euro also fell against the yen to an eight-week low of 104.61, while against sterling it fell to 82.10 pence , its lowest level since September 2010. Commodity currencies were under pressure with the Australian dollar falling for a second straight day and was was lat US$1.0370, while the New Zealand dollar was down 0.3 percent at US$0.8193. Oil and metal prices were suffering from worries about Spain, but 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 one 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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