FOREX-Euro falters near $1.30 as Spain rekindles debt worries

TOKYO, April 16 Mon Apr 16, 2012 11:28am IST

TOKYO, April 16 (Reuters) - The euro slumped on Monday, hitting a one-month low against the dollar and 1-1/2 year nadir against the British pound as soaring bond yields in Spain rekindled worries about the fragile state of the euro zone economy.

Broad risk-averse sentiment in financial markets also hurt commodity currencies such as the Australian dollar and lifted the yen to a seven-week high against the dollar.

The news over the weekend that China doubled the yuan's daily trading band against the dollar to one percent has so far had limited impact on major currencies, with market players still struggling to figure out its implications.

The euro slipped to as low as $1.30089, just shy of its March 15 low of $1.30041, with traders also trying to hit options trigger said to be lurking at $1.30.

Spain's government bond yields rose and the cost of insuring its debt hit an all-time high on Friday, as record borrowing by its banks from the European Central Bank highlighted fears about the country's finances before it tests market appetite for its debt on Thursday.

Data showed Spanish banks borrowed a record 316.3 billion euros ($412 billion) from the ECB in March, almost double the previous month's total, as they remained virtually excluded from wholesale credit markets.

European Central Bank Governing Council member Klass Knot said on Friday he did not expect the ECB to provide more cheap three-year cash and hoped the bank never has to buy bonds again. However, Knot said the ECB could still support the bond market should the need arise.

"It is hard to find a definitive trigger for the moves ... concerns about Spain have lingered and the market may be responding to any perceived lack of support for the periphery," Barclays Capital analysts wrote in a client note.

As the euro has stayed in roughly the $1.30-35 range since February, a clear break of the $1.30 mark could sour sentiment over the euro.

But some players think support around that level is likely to hold this time as well, believing the European Central Bank could support banks one way or another.

"I'm not sure if you can keep selling the euro just because bond yields are rising," said a trader at a Japanese bank.

Against the yen, the euro fell to an eight-week low of 105.25 yen. Against sterling it fell to 0.8221 pound , its lowest level since September 2010.

The euro's fall could put pressure on the euro/Swiss franc, which has been trading just above the 1.20 franc floor set by the Swiss central bank in September. It last stood at 1.2017 franc.

"I wonder if the Euro/Swiss can hold up when the euro is falling across the board. It will be interesting to see whether the market will try to test the floor," said another Japanese bank trader.

With risk aversion back in play, market players bought back the yen, driving down the dollar to seven-week low of 80.442 yen .

While many market players had expected the dollar to stay above 80 yen due to expectation of another monetary easing by the Bank of Japan later this month, some see more chance of short-covering in the yen as data showed last week speculators' net yen short positions remained near five-year high.

Commodity currencies also came under pressure. The Australian dollar fell 0.6 percent to $1.0316, edging closer to a three-month low of $1.0226 hit last week.

Some traders said the Aussie was undermined by speculation that Chinese shares could fall after China doubled the size of the currency's trading band, a move that is seen crucial in liberalising the market but could also hurt Chinese exports.

But others said Beijing's weekend decision to allow more yuan flexibility is positive for risk sentiment, believing that Chinese authorities would not push ahead with financial reforms at this time if they were not confident of avoiding a hard economic landing.

In the end, it may have limited impact as the move is unlikely to alter market views for a gradual yuan appreciation of around 2 to 3 percent this year. And in fact the yuan weakened on the first day of trading after the wider band was adopted.

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