Euro declines on Europe political concern; yen touches 2010 low

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.

Spanish Bonds

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%.

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