Reuters: US Dollar Report: FOREX-Euro heads for biggest drop in eight months

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FOREX-Euro heads for biggest drop in eight months May 31st 2012, 03:54 Wed May 30, 2012 11:54pm EDT * Worries growing Spain needs external help * Euro/yen edges nears 11-year low, hit in Jan * Dollar/yen hits 3 1/2-month low, Aussie/yen at 6-month low * US bond yield at 60-yr low, undermining dlr/yen By Hideyuki Sano TOKYO, May 31 (Reuters) - The euro was poised for its biggest drop in at least eight months as increasing likelihood of Spain needing outside assistance to fix its public finance and banking system led to a major escalation in the perennial crisis in the currency bloc. Spanish government bond yields surged to a six-month high while German bond yields fell to record lows, pushing the spread between the two to a new high, adding stress to markets already frayed by the anxiety Greece may leave the euro zone. "Things are starting to look ugly. It seems like the market is making Spain its next target after Greece," said Teppei Ino, currency analyst at Bank of Tokyo-Mitsubishi UFJ. The euro fell to as low as $1.2358, a level last seen in mid-2010, when it had bottomed at $1.1876. It has dropped 6.6 percent this month, the biggest since September. Against the yen, the common currency fell to 97.374 yen , edging near a 11-year low of 97.04 yen, hit in January, with many traders now considering a break of that low as highly likely. The euro's fall was driven by concerns that Spain, an economy bigger than that of Greece, Portugal and Ireland combined, will probably need assistance as its fragile economy and ailing banking sector make it impossible to cut deficit. So far, though, Madrid has ruled out seeking Europe's help for its banks, while EU paymaster Germany has firmly opposed any collective European banking resolution and guarantee system. "There's a huge amount of flight-to-quality moves right now. Only a policy coordination in Europe can stop this but markets can't find it now," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank. "Until we see that, people will do a trade that will minimise losses rather than make profits," Sera added. PREPARE FOR WORST Spain is by no means the only concern for investors, with markets rattled by Greek polls showing parties for and against a bailout are neck-and-neck ahead of the country's second election on June 17. Italian debt yield also rose above six percent for the first time since May while traders also warily look at whether the Irish will support Europe's new fiscal treaty as expected in a referendum on Thursday. With investors trying to escape the euro zone and to hoard liquid assets, the dollar's index against a basket of currencies rose to 20-month high of 83.11. It looks set to end above its 100-month average for the first time in almost ten years. "Everyone, from banks to companies, is now trying to prepare themselves to make sure they can get funding when they need money," said Hideki Amikura, forex manager at Nomura Trust Bank. "Wherever you look, you can't find reason to expect a reversal in this. I cannot help thinking that the euro will fall below $1.20." The dollar fell to as low as 78.71 yen, its lowest in 3 1/2 months, as investors favoured the yen, the currency of the world's largest creditor nation despite a mountain of its public debt. Fall in U.S. bond yields also helped to push down the dollar against the yen, as the currency pair is known to have strong correlation with the yield gap between the two countries. The 10-year U.S. bond yield fell below 1.6 percent , not seen at least for six decades an cutting yield advantage over JGBs to near the lowest level in recent decades. The dollar for now has a crucial support from its 200-day moving average at 78.63 yen. The Australian dollar fell 0.3 percent to a fresh six-month low of $0.9673, after having fallen 1.3 percent on sharp fall on oil and commodity prices on Wednesday. Selling by Japanese accounts against the yen was also a driver in its fall, with the Aussie/yen falling to six-month low of 76.26 yen. Highlighting the impact of gloomy global economic outlook on commodity exporters and emerging markets, Brazil cut interest rates to record low of 8.50 percent. Link this Share this Digg this Email Reprints

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