Reuters: US Dollar Report: FOREX-Euro drops to near 2-year low on Spain bank woes

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FOREX-Euro drops to near 2-year low on Spain bank woes May 29th 2012, 16:45 Tue May 29, 2012 12:45pm EDT * Euro falls beneath key level at $1.25 * Spanish banking problems overtake worries about Greece * Egan-Jones Ratings cut Spain's credit level By Wanfeng Zhou NEW YORK, May 29 (Reuters) - The euro slid to almost a two-year low against the dollar on Tuesday as worries about Spain's soaring borrowing costs and its troubled banks looked set to prompt more selling of the common currency. Egan-Jones Ratings cut Spain's credit rating yet again on Tuesday, the agency's third downgrade of the country's sovereign rating in less than a month as Spain's weak banks continue to worry investors. Spanish bond yields held near peaks in Tuesday's trading. The spread between Spanish and German government bond yields hit its highest since the euro was launched in 1999 after a government source said Madrid will recapitalize nationalized lender Bankia by issuing new debt. "All eyes are on Spanish borrowing costs now. We're stuck in a $1.25-$1.2640 range, which suggests everyone who wants to be short the euro is already short," said Kathy Lien, director of currency research at GFT in Jersey City. "The next catalyst could come from a rise above 7 percent in Spanish yields, which would accelerate selling. But if not, we could see some consolidation." The euro fell 0.6 percent to $1.2464, after hitting a session low of $1.2461 on Reuters data, the weakest since July 1, 2010. Losses accelerated after the downgrade from Egan-Jones and as the currency fell beneath $1.25 - a key psychological level. The next downside target lies around $1.2450, where traders reported stop-loss sell orders and option barriers. The euro also slipped 0.7 percent to 98.97 yen. It had earlier dropped to 98.91 yen, the lowest since January. The dollar was down 0.1 percent at 79.38 yen, not far from a recent three-month low of 79.002 yen set on trading platform EBS. The pair briefly slipped after data showed U.S. consumer confidence unexpectedly fell to its lowest level in four months. Against the Swiss franc, the dollar climbed to a 15-month high of 0.9633 and was last up 0.5 percent at 0.9625 franc. BANK WORRIES Earlier, the single currency also found support after Greek polls showed more support for pro-bailout parties ahead of the country's election on June 17, easing fears that Greece may leave the euro zone. But the gains were also short-lived. Many traders expect further downside in the euro as they fear troubles at Spanish banks, hit by a property slump, could further complicate Madrid's efforts to rein in its debt. Spanish 10-year bond yields hovered around 6.5 percent. A level of 7 percent is seen as critical. Euro-zone countries that have previously requested bailouts did so soon after their 10-year yields rose above that mark. "The bad news just keeps coming, and if Spain were to ask for a bailout, we would see the euro come under more pressure," said Steve Barrow, head of G10 currency research at Standard Bank. "The euro remains a currency that is sold at every opportunity. We have revised our three- to six-month forecasts down to $1.15 from $1.20 earlier." Spain's fourth-largest lender Bankia has asked for a bailout of 19 billion euros, in addition to 4.5 billion euros the state has already pumped in to cover possible losses on repossessed property, loans and investments. Prime Minister Mariano Rajoy has ruled out seeking outside aid to revive Spain's banking sector, but many investors are skeptical that the country's lenders can be recapitalized without external funding. Most economists believe that Spain's banks will need outside financial help. "The point about Spain is it's going to need some external support of some form," said David Owen, chief European financial economist at Jefferies. "Whether that implies the European Central Bank buys bonds (in the secondary market) or moves lock, stock and barrel to quantitative easing over the next three months, certainly the situation at the moment is not sustainable." Link this Share this Digg this Email Reprints

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