The euro fell the most in two weeks against the dollar as Italian and Spanish bonds slumped amid political turmoil in the euro-area’s third- and fourth-largest economies, damping demand for the shared currency.
The 17-nation euro dropped versus the majority of its 16 major peers as Spanish Prime Minister Mariano Rajoy faced calls to resign after newspaper reports alleged he accepted illegal cash payments. A poll showed former Italy Premier Silvio Berlusconi closed the gap on front-runner Pier Luigi Bersani even as he appeals a four-year prison sentence for tax fraud. The yen weakened beyond 93 per dollar for the first time since May 2010. European Central Bank policy makers meet this week.
The political uncertainty in Spain and Italy has “provided a convenient excuse for investors to take some profit off the table,” Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, said in a telephone interview. “The broader theme for the euro is caution ahead of the ECB meeting this week.”
The euro declined 0.5% to $1.3571 at 9:13 a.m. in New York after falling as much as 0.7%, the biggest decline since Jan. 18. The common currency slipped 0.7% to 125.80 yen. The yen rose 0.1% to 92.70 per dollar after sliding to 93.18, the weakest level since May 13, 2010.
The ECB, which has held its main refinancing rate at 0.75% since July, will make no change at its next policy decision on Feb. 7, according to the median forecast of 58 economists surveyed by Bloomberg. Central-bank President Mario Draghi may signal more openness to a rate cut in his press conference, according to Citigroup Inc. in a Feb. 1 report.
Spain’s 10-year bond yield climbed as much as 22 basis points, or 0.22 percentage point, to 5.42%, the highest since Dec. 18. Rajoy, who says the allegations published in Spain’s biggest newspaper El Pais are unfounded, travels to Berlin today to meet German Chancellor Angela Merkel.
Italian 10-year yields jumped seven basis points to 4.40%. The additional yield investors demand to hold the securities instead of German bunds increased for a fourth day after Prime Minister Mario Monti said the spread may widen if Berlusconi is elected this month.
“It doesn’t help that the political background is a little bit more uncertain,” said Adam Cole, head of global currency strategy at Royal Bank of Canada in London. The ECB meeting will “be a negative background for the currency this week.”
The euro will depreciate to $1.30 by year-end, Cole said. His prediction matches the median of 60 estimates compiled by Bloomberg. Implied volatility from options trading shows the chance of it ending the year below that level is 28%.
Barclays Plc raised its forecasts for the euro against the dollar to take into account gains that pushed the shared currency to the strongest level since November 2011 last week. The euro will drop to $1.32 in six months and $1.28 in a year, higher than from previous estimates of $1.26 and $1.22, strategists Raghav Subbarao and Guillermo Felices in London wrote today in a note to clients.
The yen fell against the dollar, extending a record 12 straight weeks of declines, as Prime Minister Shinzo Abe’s administration presses the central bank to ease monetary policy further to beat deflation.
Finance Minister Taro Aso said yesterday the government is imitating his Depression-era predecessor, Korekiyo Takahashi, who told the Bank of Japan to underwrite government debt to fund deficit spending.
“The yen weakness story remains on expectations that the BOJ will keep its accommodative stance,” said Daisaku Ueno, a senior foreign-exchange and fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo.
The yen tumbled 16% over the past three months, the biggest decline among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 4.8% and the dollar dropped 1.6%.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S trading partners, gained 0.4% today to 79.417.
South Korea’s won rose the most in 14 months against the dollar after U.S. and Chinese reports added to signs of recovery in the world’s largest economies and comments from a Bank of Korea official eased intervention concern.
The currency climbed from a three-month low after official reports showed U.S. employers added workers last month and China’s services industry grew at the fastest pace since August. Bank of Korea board member Moon Woo Sik said it’s too early for any central bank response to the yen’s slide against the won.
The won appreciated 1.2% to 1,084.78 per dollar at the close of trading in Seoul, the biggest advance since December 2011.