Tuesday 27 June 2017

Euro falls on renewed concern about Spain’s public finances

Bo Nielsen

The euro dropped against the dollar amid renewed concern that the debt crisis in the euro region is spreading to Spain.

The common currency also fell against the yen after El Economista reported that the International Monetary Fund, the European Union and the US Treasury are putting together a credit line of as much as €250bn for Spain.

The report was denied by the EU and the Spanish government.

“Focus is back on Spain after a couple of days of news about global growth,” said Arne Lohmann Rasmussen, chief currency analyst with Danske Bank in Copenhagen.

“Most of the euro’s recent gains came from short covering, and the move up is petering out,” he said, referring to investors buying back euros to unwind bets that the currency would fall.

The euro dropped 0.2pc to $1.2304 at 11:10am in London, the biggest daily decline since June 7 based on closing prices.

It was at 112.75 yen from 112.78 yesterday in New York.

Rasmussen predicted the common currency will sink to $1.15 in three months. The euro also declined after it failed to stay above $1.235, a level important to maintain the currency’s recent upward momentum, according to BNP Paribas.

“The rebound we’ve seen in the euro is purely a correction,” said Ian Stannard, an analyst in London at BNP Paribas. “We’ll soon head lower again.”

The yield premium investors demand to hold Spanish 10-year government bonds instead of German bunds rose to a euro-era record after the report of IMF aid.

The difference in yield, or spread, between the securities widened to 216 basis points, the most since 1997, Bloomberg generic data shows.

Russian reserves

The euro earlier rallied to $1.2353 after US stocks gained and results from debt auctions in Ireland and Spain renewed optimism that indebted nations can still tap markets for funding.

September futures on the Standard & Poor’s 500 Index fell 0.4pc today, suggesting the market will open lower.

Fluctuations in both the dollar and the euro prompted Russia to say it may add the Australian and Canadian dollars to its international reserves for the first time.

“Adding the Australian dollar is being discussed,” Alexei Ulyukayev, the central bank’s first deputy chairman, said in an interview at an event hosted by Bloomberg in Moscow last night.

“There are pros and cons. We have added the Canadian dollar but haven’t yet begun operations” with the currency, he said.

US dollars account for 47pc of Russia’s reserves, while euros make up 41pc, British pounds 10pc and Japanese yen 2pc, Ulyukyaev said in November.

The central bank has reduced dollars from 50pc in 2006, when euros accounted for 40pc and the remaining 10pc was in yen and pounds.

President Dmitry Medvedev last year suggested Russia would reduce its use of the dollar as a reserve currency. Russia’s international reserves, the world’s third-biggest, reached $458.2bn on June 4.

Bloomberg

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