May 30, 2012 / 4:57 PM / 5 years ago

FOREX-Euro falls near 2-year low as debt crisis widens

* Euro heads toward low $1.20s on Spain worries
    * Spanish debt yields near dangerous levels, risk of bailout
growing
    * Italian borrowing costs soar at bond sale


    By Wanfeng Zhou	
    NEW YORK, May 30 (Reuters) - The euro slumped to a near
two-year low against the dollar on Wednesday with no relief in
sight as Italian borrowing costs soared and concerns mounted
over Spain's banking sector.	
    Selling accelerated after the euro broke beneath the
psychologically important $1.25 level and option barrier at
$1.24, opening the way for a slide toward the low $1.20 area.
Rea l money and institutional investors stepped up selling on
signs the bloc's debt crisis is spreading to larger economies.	
    "I think everybody was looking for an excuse to jump on the
bandwagon for selling the euro," said Ravi Bharadwaj, market
analyst at Western Union Business Solutions in Washington, D.C.	
    "The fear is that a lot of the imbalances that have been
built up so far have been funded and financed by banks in
Europe. As the different sovereign entities look to stabilize
their financial systems, they are in effect just feeding a
massive feedback loop."	
    Italy's funding costs rose sharply at a bond sale on
Wednesday, with 10-year yields topping 6 percent
for the first time since January. The Spanish equivalent
 neared the dangerous 7 percent level that had
forced Ireland and Greece to seek bailouts.	
    The euro fell as low as $1.2384 on Reuters data, the
lowest since July 1, 2010. It was last at $1.2402, down 0.8
percent on the day. Support now lies around $1.2150, a low
touched in late June 2010, and then the 2010 low of $1.1875.	
    Adding to pressure on the euro were poll results showing
Greece's radical leftist SYRIZA party has taken the lead over
the pro-bailout conservatives. Greece is holding a national
parliamentary election next month that may determine whether the
debt-laden country stays in the euro zone.	
    The euro staged the short-lived bounce after the European
Commission said the euro zone should move towards a banking
union and consider eurobonds and the direct recapitalisation of
banks from its permanent bailout fund. 	
    The jump in Italian and Spanish bond yields came a day after
Egan-Jones Ratings cut Spain's credit rating, the agency's third
downgrade of the country's sovereign rating in less than a
month, citing the country's weak banks as the reason for the
downgrade.	
    A government source told Reuters on Tuesday that Spain would
likely recapitalize Bankia, which asked for 19 billion
euros on Friday, by issuing new debt and possibly drawing cash
from the bank restructuring fund and Treasury
reserves. 	
    "The euro is in an extremely vulnerable position and
downside risks are very strong indeed," said Jane Foley, senior
currency strategist at Rabobank. "The Spanish banking crisis has
the potential to knock the stuffing out of the euro zone
irrespective of the Greek election results."	
    "The issues for Spain are undoubtedly huge and most people
are coming round to the idea that it will need to go outside of
its borders for assistance. The longer it delays, the more the
risk of a bank run."	
    The euro lost 1.5 percent against the safe-haven yen
, taking it to a four-and-a-half month low of 97.73
yen. The dollar hit a three-and-a-half month low of 78.85 yen
and was last down 0.7 percent at 78.94.	
    The dollar index, which measures its value against a
basket of currencies, rise to a 20-month high of 82.941. 	
    Technical analysts said a monthly close about the 100-month
average in the dollar index around 81.82 may herald a shift in
the longer-term trend of the dollar and reverse a multi-year
drift lower.	
    The dollar also rose to a 15-month high against the Swiss
franc at 0.9696 francs on EBS.   	
    The higher-yielding Australian dollar fell 1.2 percent to
$0.9716, slipping towards a six-month low at $0.9690,
after weaker-than-expected retail sales data underscored the
case for interest rate cuts.

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