May 30, 2012 / 8:23 PM / 5 years ago

FOREX-Euro falls 1 pct vs U.S. dollar to near 2-year low

* Euro falls 1 percent vs U.S. dollar, a near 2-year low
    * Spanish debt yields near dangerous levels, risk of bailout
growing
    * Italian borrowing costs soar at bond sale
    * Sterling off 1 percent vs USD, greenback at 15-month high
vs Swiss franc


    By Daniel Bases	
    NEW YORK, May 30 (Reuters) - The euro weakened 1 percent in
value against the U.S. dollar on Wednesday, slumping to a near
two-year low as Europe's sovereign debt crisis and banking
sector concerns sapped investors' resolve and pushed them to
sell the euro zone common currency.	
    The U.S. dollar hit a fresh 15-month high against the Swiss
franc while sterling dropped about 1 percent against the
greenback. Investors also bought Japanese yen as a safe haven.	
    A bond sale in Italy on Wednesday resulted in surging costs
for the government. Rome was forced to pay a yield of more than
6 percent on 10-year debt for the first time since January
. The Spanish equivalent neared the
dangerous 7 percent level that forced Ireland and Greece to seek
bailouts.	
    Greece's potential exit from the euro zone, a scenario that
officials are preparing for while still advocating it remain a
part of the currency union, have set a generally skittish
environment in Europe.	
    "There are worries now that you could see the issues in
Europe not being constrained to just staying in Europe and could
have more of a worldwide effect. That's very dangerous and why
you are seeing the action you are seeing today," said Bob
Gelfond, chief executive officer of MQS Asset Management, a
global-macro hedge fund in New York.	
    Asset managers and strategists say the focus in Europe is
too much on austerity, meaning policy makers are addressing the
short-term symptoms such as unsustainable debt rather than root
causes such as promoting long-term growth.	
    Real 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."	
    The euro fell as low as $1.2360, according to Reuters
data, the lowest since July 1, 2010. It was last at $1.2374,
down 0.98 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. 	
    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 0.53 percent at 79.10.	
    Sterling dropped over 1 percent against the U.S. dollar
 to $1.5476, extending its losses to a fresh four-month
nadir. In May alone, it is down 4.7 percent.	
    The dollar index, which measures its value against a
basket of other major currencies, rose 0.7 percent to 83.072,
its best level since September 2010.	
    The dollar also rose over 1 percent to a new 15-month high
against the Swiss franc at 0.9714 franc on Reuters.   	
    The higher-yielding Australian dollar fell 1.23 percent to
$0.9721, 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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