The euro fell on Tuesday, coming close to recent lows versus the dollar and hitting a one-month low against the yen as rises in euro zone bond yields underscored the difficulties facing policy makers in containing the region’s debt crisis.
Italian borrowing costs continued to rise despite the appointment of former EU Commissioner Mario Monti to head a new government in Italy. Spanish yields also rose ahead of the launch of a new 10-year bond on Thursday.
However, in a worrying sign of the crisis moving beyond the euro zone periphery, the spread of French, Belgian and Austrian 10-year bonds over German Bunds hit euro-era highs while the equivalent Dutch spread hit its highest since early 2009.
The euro was down 0.7 per cent at $1.3524, edging closer to last week’s one-month low of $1.3484 and pulling well away from the late October high of $1.4248.
The single currency also lost around 0.9 per cent against the yen to hit a one-month low of 104.13 yen on trading platform EBS.
“The euro zone debt crisis continues to escalate ... The ultimate outcome is still unclear – whether the euro zone moves closer to fiscal integration or whether there is a more disorderly break-up,” said Lee Hardman, currency economist at BTMU, who expects the euro to fall to around $1.25 over the next six months.
“There had been some optimism at the appointment of technocratic governments in Italy and Greece but it was not very long-lived,” he said, adding there was a risk the market would start to price in a “disorderly outcome” to the crisis.
Data from the Commodity Futures Trading Commission showed speculators cut back net short positions in the euro in the week to Nov. 8, suggesting the euro had diminishing scope for more short-covering rallies.
“A break below $1.3480 would leave people more inclined to take on fresh short positions,” said Niels Christensen, currency strategist at Nordea in Copenhagen, adding that the common currency would be particularly sensitive to further moves in euro zone bond yields.
In a further sign the debt crisis is hitting the euro zone economy, a survey showed German analyst and investor sentiment slumped in November, the ninth monthly decline in a row, though data showed steady euro zone growth in the third quarter.
Italian 10-year yields rose back above the 7 per cent level perceived to be economically unsustainable, while Spain’s Treasury paid levels not seen since 1997 to sell short-term debt as failing confidence in leaders’ ability to stem the debt crisis forced up risk premiums.
Yields at a €3-billion five-year Italian bond sale on Monday hit euro-era highs of 6.29 per cent , just a day after Mr. Monti was named to lead the country.
More euro zone debt auctions are coming this week, with Spain aiming to sell 3 to €4-billion of 10-year bonds on Thursday.
The dollar was 0.15 per cent lower against the yen at ¥77.00. It had earlier jumped around 40 pips to an intraday high of 77.51 yen but gave back its gains.
“It would appear to me that demand for dollar/yen on a 76 handle has increased,” a London-based trader said, but added that investors would be likely to sell the dollar on rallies as the yen was well-placed to gain in a risk-averse environment.
Market players remain wary of the possibility of Japanese action to curb the yen’s strength after Japan sold an estimated ¥7.7-trillion ($98.5-billion U.S.), a daily record for intervention, on Oct. 31.