The euro fell to the lowest level in almost two years against the dollar as Spain struggled to rescue its troubled banks, adding to signs the European debt crisis is spreading to the region’s larger economies.
The 17-nation currency slid for a seventh day versus the yen, the longest losing streak in four months, after Italy sold less than its maximum target at a debt auction. The yen and dollar strengthened as investors sought safer assets after a European report showed economic confidence dropped more than economists estimated in May. Asian currencies weakened, pushing the Bloomberg-JPMorgan Asia Dollar Index to the lowest level since September 2010.
“The market has lost confidence in the euro,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “We’re a little oversold but certainly the path is very clear to possibly testing $1.20 or the $1.1876 low of 2010. People are battening down the hatches and continue to trade very defensively.”
The euro declined 0.8 percent to $1.2407 at 12:17 p.m. New York time. The single currency fell 1.5 percent to 97.96 yen. It dropped to 97.76 yen, the lowest level since Jan. 18. The yen gained 0.7 percent to 78.89 per dollar after touching 78.87, the strongest since Feb. 17.
The shared currency fell to as low as $1.2386, the weakest since July 2010. It reached $1.1877 in June that year, which was the lowest level in four years, after escalating concern about Greece led to the bloc’s first bailout. Since its inception in 1999, the euro has traded as low as 82.30 U.S. cents, in 2000, and as high as $1.6038 in July 2008.
The euro has depreciated 6.3 percent against the dollar this month, the most since September, and slid 7.4 percent versus the yen.
The yield on German two-year government notes fell to zero for the first time before trading at 0.010 percent. The average since the euro’s inception is 2.79 percent.
“The euro could go lower, maybe it can go down towards $1.20,” said Jane Foley, a senior currency strategist at Rabobank International in London. “The question is, will the downside risks turn into a downward spiral?”
Spain’s 10-year bond yield rose as high as 6.70 percent, approaching the 7 percent level that led to bailouts in Greece, Ireland and Portugal, after central bank Governor Miguel Angel Fernandez Ordonez resigned a month early amid criticism over the nationalization of Bankia group.
The European Commission called for direct euro-bloc aid for troubled banks and touted a Europe-wide deposit-guarantee system and common bond issuance as antidotes to the debt crisis now threatening to overwhelm Spain.
The commission, the European Union’s central regulator, sided with Spain in proposing that the euro’s permanent bailout fund inject cash to banks instead of channeling the money via national governments. It also offered Spain extra time to squeeze the budget deficit.
“The focus was on Greece and the way the electorate sentiment was going,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. (WBC) in New York. “That’s now completely been pushed to the sidelines by concerns about Spain. Europe’s just so broad and lacking in policy coordination, that’s the problem.”
Greece’s New Democracy party and Syriza party are tied for first place in the country’s June 17 vote according to an opinion poll by Pulse, Naftemporiki newspaper reported.
The euro has declined 2.2 percent this year against nine developed-market counterparts tracked by Bloomberg Correlation- Weighted Indexes. The dollar climbed 2.8 percent, the best performer, while the yen lost 0.1 percent.
The yen surged at least 0.5 percent against all 16 of its major peers tracked by Bloomberg after Italian borrowing costs climbed and European confidence plummeted, boosting investor demand for the safest assets.
Italy sold 5.73 billion euros of bonds as yields rose from the previous sale in April. The Treasury auctioned 10-year debt at a rate of 6.03 percent, the highest since Jan. 30. Investors bid for 1.4 times the amount offered, down from 1.48 last month. Italy also sold five-year notes to yield 5.66 percent, compared with 4.86 percent last month.
An index of executive and consumer sentiment among the euro member nations fell to 90.6 from a revised 92.9 in April, the European Commission said today. That’s the lowest since October 2009 and below the 91.9 forecast by economists, according to the median of 28 estimates in a Bloomberg News survey.
The 14-day relative strength index for the euro against the yen was under 20, below the 30 level that some traders see as a sign that an asset price may be about to reverse course.