Euro weakens on concern Spanish banking aid won’t stem crisis

July 20 (Bloomberg) -- The euro approached a two-year low against the dollar on concern the region’s financial crisis is far from being resolved even after officials agreed on an aid package for Spain’s banks.

The shared currency dropped below $1.22 after Reuters reported that the Valencia region in Spain will seek the nation’s help to repay debt, citing a statement. Euro-area finance ministers gave full approval today to the bank-aid package of as much as 100 billion euros ($122 billion).

“Spain’s Valencia region requesting help triggered a little bit of selling, which broke the previous lows and triggered some stop-loss orders below it,” Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York, said in a telephone interview. A stop- loss is an automatic trading order that limits losses.

The euro dropped 0.7 percent to $1.2191 at 9:02 a.m. in New York. It touched $1.2163 on July 13, the lowest since June 2010. The shared currency fell 0.7 percent to 95.80 yen. Japan’s currency was little changed at 78.58 to the greenback.

The 17-nation currency depreciated to the lowest in more than three years versus the pound before data next week that economists said will show a gauge of consumer confidence was close to a three-year low and manufacturing shrank for a 12th month in the bloc.

‘Acute Contraction’

“There are a number of issues with the European economy,” said Andrew Salter, a currency strategist in Sydney at Australia & New Zealand Banking Group Ltd. “It’s pretty clearly in quite an acute contraction. The euro is going to remain a weak currency.”

An index of consumer sentiment in the euro region probably fell to minus 20 in July from minus 19.8 a month earlier, economists surveyed by Bloomberg News predict. The European Commission will release the figure on July 23. The index slid to minus 21.3 in December, the lowest level since August 2009.

A gauge of manufacturing in the currency bloc is estimated to be at 45.2 this month, according to a separate survey. That’s below the 50 level that divides expansion from contraction and compares with a reading of 45.1 last month. London-based Markit Economics is scheduled to report the data on July 24.

Spain’s Cabinet approved the creation of an 18 billion-euro fund on July 13 to help regions that have lost access to markets meet debt redemptions and finance deficits. The decree states the facility will be funded with public debt and the Treasury’s borrowing program will “incorporate the amounts” needed.

The Catalonia region had requested Spanish government aid on May 25, when Catalan President Artur Mas said it was running out of debt financing options and needed help.

The central government will tap the lottery for part of the fund, leaving 12 billion euros for the Treasury to finance. Economy Minister Luis de Guindos said yesterday the plan won’t affect the nation’s borrowing program.

Bloomberg News

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