Euro falls before debt auctions as Merkel rejects joint bonds

Debt Sales

Italy is scheduled to sell inflation-linked securities maturing in September 2016 and September 2026 tomorrow, along with as much as 3 billion euros ($3.8 billion) of May 2014 zero- coupon notes. Spain will offer three- and six-month bills the same day. The yield on Italy’s two-year note jumped 50 basis points, or 0.50 percentage point, to 4.30 percent today, with the equivalent-maturity Spanish rate 42 basis points higher at 4.85 percent.

France and Italy are urging Germany to take decisive action to end the debt crisis, now in its third year, after Spain’s 10- year bond yields jumped to more than 7 percent last week.

The two-day EU summit in Brussels starting June 28 is the first meeting of European leaders since Greek parliamentary elections on June 17. New Democracy leader Antonis Samaras became prime minister on his pledge to seek relief from austerity measures imposed on the country while keeping the bailout funds flowing. The Greek leader won’t attend the meeting this week after undergoing eye surgery.

Trend Lower

The euro will likely trend lower during the remainder of June and hit $1.22 by the end of the month, Camilla Sutton, chief currency strategist at Bank of Nova Scotia’s Scotia Capital unit Toronto, wrote in a note today. The EU summit is unlikely to provide a long-term solution to Europe’s problems, she wrote.

The shared currency will drop to $1.20 by year-end as Europe’s debt crisis worsens, according to State Street Corp., which oversees $16.9 trillion in custody assets. Investors should sell the 17-nation euro and buy the U.S. dollar, said Collin Crownover, head of State Street’s currency management in Boston, Massachusetts.

“There are fairly low expectations,” Richard Franulovich, a New York-based senior currency strategist at Westpac Banking Corp., said of the European summit in a telephone interview. “I don’t think you’re going to see anything concrete that’s going to contain markets in the short run. There are a lot of reasons to be cautious on the euro.”

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