Spain Struggles To Rescue Troubled Banks, Euro Falls To 2-Year Low

The euro fell to the lowest level in almost two years against the dollar as Spain struggled to rescue its troubled banks, adding to signs the European debt crisis is spreading to the region’s larger economies. The 17-nation currency slid for a seventh day versus the yen, the longest losing streak in four months, after Italy sold less than its maximum target at a debt auction. The yen and dollar strengthened as investors sought safer assets after a European report showed economic confidence dropped more than economists estimated in May.

The euro declined 1.1 percent to $1.2367 in New York. The single currency fell 1.6 percent to 97.79 yen. It dropped to 97.76 yen, the lowest level since January 18. The yen gained 0.5 percent to 79.08 per dollar after touching 78.87, the strongest since February 17.The shared currency fell to $1.2362, its weakest since July 2010. It reached $1.1877 in June that year, which was the lowest level in four years, after escalating concern about Greece led to the bloc’s first bailout. Since its inception in 1999, the euro has traded as low as 82.30 U.S. cents, in 2000, and as high as $1.6038 in July 2008.  EUR/USD" title="EUR/USD" width="676" height="411">
GBP/USD

The pound weakened to a four-month low against the dollar amid speculation the fallout from Europe’s debt crisis is spreading and will harm the outlook for the U.K. economy. Sterling dropped for a third day against the yen as Nobel laureate Paul Krugman said the U.K. government should drop its commitment to fiscal cutbacks and boost spending to avert an extended downturn. Gilts jumped, with five- and 10-year yields dropping to records, after Bank of England Markets Director Paul Fisher said U.K. companies need to protect against the risk of a euro breakup.

The cost of insuring Spanish government bonds against default rose to an all-time high. Sterling is going to increasingly feel the negative effects coming from the euro region and the news about the Spanish banking system. Sterling has a lot of linkages to the euro region through the banking system and via trade, so it will come under pressure as the situation in the euro region intensifies. The pound fell 0.7 percent to $1.5538 after dropping to $1.5523, the weakest since Jan. 23. The U.K. currency slid 1.3 percent to 122.70 yen, and was little changed at 79.83 pence per euro. Morgan Stanley forecasts the pound will depreciate to $1.53 by year-end. 
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USD/JPY

The U.S. dollar edged lower against the yen as safe haven demand was boosted by sustained concerns over Spain’s ailing banking sector while comments by the Bank of Japan lent support to the yen. USD/JPY hit 79.40 during early European trade, the daily low; the pair subsequently consolidated at 79.36, falling 0.18%. Market sentiment weakened as the yield on Spanish 10-year bonds climbed to their highest level so far this year on Tuesday, approaching the critical 7% threshold, after a Spanish official said the government is preparing to recapitalize Bankia, one of the country’s largest commercial lenders. Adding to concerns, Bank of Spain Governor Miguel Angel Fernandez Ordonez resigned a month early, handing to his successor the task of convincing investors that Spanish banks will not need an international bailout. Meanwhile, BoJ policymakers signaled that Japan will likely achieve the 1% inflation target without further monetary easing, saying the bank’s February and April stimulus measures have heightened chances of economic recovery.
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USD/CAD

Canada’s dollar depreciated the most in a week as turmoil in the Spanish banking sector added to signs Europe’s debt crisis is spreading to the region’s larger economies, boosting demand for safety. The Canadian currency was headed for a 4.2 percent decline in May, the biggest monthly loss since September, on speculation softening global growth will reduce chances of a Bank of Canada interest-rate increase. The nation’s 10-year government bond yield dropped to the lowest level since at least 1989, 1.770 percent, and yields on 30-year securities fell to a record low 2.320 percent. Canada’s currency, nicknamed the loonie, declined 0.8 percent to CAD 1.0301 per U.S. dollar in Toronto. It slid as much as 0.9 percent, the biggest intraday drop since May 23, to CAD 1.0311, almost the weakest since January.
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