Wednesday, 23 November 2011

Euro Slides on Weak German Bond Sale

The euro sank to a seven-week low against the dollar on a shockingly poor German government bond auction.

Germany sold only €3.6 billion of the €6 billion in 10-year benchmark bonds on offer, sparking worries that the euro-zone debt crisis might even be spreading to its hitherto solid core.

"I cannot recall a worse auction," said Marc Ostwald, a rates strategist at Monument Securities in London. "If Germany can only manage this sort of participation, what hope for the rest?"

A German Finance Agency spokesman said the auction reflected a nervous market but the "result doesn't mean any refinancing bottleneck for the budget."

Around the same time as the German sale, the Bank of Greece said the country risked a disorderly exit from the euro zone, adding to the pressure on the euro. Midday in New York, it stood at $1.3347, down from $1.3505 late Tuesday in New York and just above the day's low of $1.3326, its lowest level since Oct. 6.

Concerns over the euro zone's debt woes have kept the common currency under pressure in the past few days, and weak Chinese and euro-zone data released Wednesday had already fanned concerns about the health of the global economy. But the poor auction suggests the crisis may have reached a tipping point where confidence in the euro-zone project as a whole, including Germany, is running out.

"It's an overdue sell-off," said Todd MacDonald, head of foreign exchange trading at Standard Chartered in New York. He said he expects the euro to fall to $1.3150 over the next week.

A closely watched euro-zone survey indicated that private-sector activity declined for a third straight month in November. Markit Economics said the composite Purchasing Managers Index for the euro zone rose to 47.2 from 46.5, remaining below the 50.0 level that distinguishes expansion from contraction.

Data also showed industrial orders around the 17 countries that share the euro fell in September at the fastest pace since December 2008.

"The euro area economy is faced with strong headwinds from ongoing fiscal consolidation and the deleveraging in the bank sector, which is likely to weigh on both investments and private consumption," Danske Bank said in a note to clients.

In addition, China's November HSBC flash manufacturing PMI fell 3 points to a 32-month low 48. A level below 50 signals contraction.

Separately, the Bank of Greece, in a starkly worded interim monetary policy report for 2011, said the latest European Union-led bailout package for the country represented a last chance for the country to make good its reform program.

Failure to do so would lead to "an uncontrolled downward trajectory that would undermine many of the achievements that have been attained in recent decades, drive the country out of the euro area and set Greece's economy, standard of living, society and international standing back many decades," it said.

Meanwhile, Belgium's De Standaard newspaper said Belgium, unable to meet the terms of the rescue plan for Franco-Belgian bank Dexia, is asking France to renegotiate and a greater French burden is a "possible outcome." The report, which didn't cite any sources, said Belgian and French officials denied they are renegotiating the dismantling of Dexia.

The report rekindled talk that France's triple-A credit rating might be in danger.

Among other currencies, the dollar was at ¥77.41, up from ¥76.97 late Tuesday. The dollar was at 0.9202 Swiss franc, from 0.9141 franc, and the U.K. pound was at $1.5509, down from $1.5634.

Japanese markets were closed for a holiday.
—Anusha Shrivastava contributed to this article.