Euro falls to two-year low on Spanish bank concern

May 30 (Bloomberg) -- The euro fell to the lowest 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. Asian currencies weakened, pushing the Bloomberg-JPMorgan Asia Dollar Index to the lowest level since September 2010.

“All roads lead to a weaker euro,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “You’ve got a crisis of confidence. The credibility of the policy makers is at stake and that pressures the euro.”

The euro declined 0.7 percent to $1.2417 at 9:46 a.m. New York time. The single currency fell 1.4 percent to 97.99 yen. It dropped to 97.97 yen, the lowest level since Jan. 18. The yen gained 0.7 percent to 78.89 per dollar after touching 78.88, the lowest since Feb. 17.

The shared currency fell to as low as $1.2408, the 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.

The European currency has depreciated 6.2 percent against the dollar this month, the most since September, and slid 7.2 percent versus the yen.

‘Downward Spiral’

“The euro could go lower, maybe it can go down towards $1.20,” said Jane Foley, a senior currency strategist at Rabobank International in London. “The question is, will the downside risks turn into a downward spiral?”

Spain’s 10-year bond yield rose as high as 6.70 percent, approaching the 7 percent level that led to bailouts in Greece, Ireland and Portugal, after central bank Governor Miguel Angel Fernandez Ordonez resigned a month early amid criticism over the nationalization of Bankia group.

The European Central Bank said the Spanish government hasn’t consulted it on any plans to recapitalize a major bank. The ECB’s comment chimes with Spanish Economy Minister Luis de Guindos’s remarks to lawmakers today that his government hasn’t presented proposals to recapitalize BFA-Bankia, the nation’s third-biggest lender. The Financial Times reported earlier that the ECB had rejected its potential involvement in such a plan.

Spain, Greece

Spain yesterday backtracked on a plan to use government debt instead of cash to bail out Bankia, while Prime Minister Mariano Rajoy struggles to shore up the nation’s lenders without overburdening public finances.

The market is “focusing a little bit more on Spain than the Greek elections at the moment and, of course, the Spanish bank problems,” David Forrester, senior vice president for Group-of-10 foreign-exchange strategy in Singapore at Macquarie Bank Ltd., said in an interview with Bloomberg Television. The euro may extend losses toward $1.20, he said.

The euro has declined 2.1 percent this year against nine developed-market counterparts tracked by Bloomberg Correlation- Weighted Indexes. The dollar climbed 2.5 percent, the second- best performer after the pound, which has gained 2.8 percent, while the yen lost 0.6 percent.

The yen surged at least 0.5 percent against all 16 of its major peers tracked by Bloomberg after Italian borrowing costs climbed and European confidence plummeted, boosting investor demand for the safest assets.

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