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FOREX-Euro nears 2-year low as debt crisis escalates
May 30, 2012 / 2:27 PM / 6 years ago

FOREX-Euro nears 2-year low as debt crisis escalates

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

    By Wanfeng Zhou	
    NEW YORK, May 30 (Reuters) - The euro fell 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.	
    The euro zone common currency looked headed towards the low
$1.20s, analysts said. It broke decidedly beneath the
psychologically important $1.25 level on Tuesday. Real money and
institutional investors stepped up selling on further signs the
bloc's debt crisis is spreading to larger economies.	
    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 other euro zone countries to seek bailouts.	
    "Uncertainty remains high and headline risk is likely the
key driver," said Camilla Sutton, senior currency strategist at
Scotia Capital in Toronto. "The fear is that we only have
band-aid solutions and we still don't have a medium-term plan
for Europe."	
    The euro fell as low as $1.2406 on Reuters data, the
lowest since July 1, 2010. It was last at $1.2411, down 0.7
percent on the day.	
    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.	
    More falls could see the euro test a reported options
barrier at $1.2400. Below there it has little chart support
until $1.2151, a low hit in late June 2010, and then the 2010
low of $1.1876.	
    It 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. 	
    But most investors sold into the bounce as "these proposals
will take a long time and will entail changes to the treaty,"
said Geoffrey Yu, currency strategist at UBS.	
    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. It cited the country's weak banks.	
    "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 1.4 percent against the safe-haven yen
, taking it to a four-and-a-half month low of 97.90
yen. The dollar hit a three-and-a-half month low of 78.88 yen
and was last down 0.6 percent at 78.98.	
    The dollar index, which measures its value against a
basket of currencies, rise to a 20-month high of 82.834. 	
    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 0.9679 francs on EBS.   	
    The higher-yielding Australian dollar fell 1.2 percent to
$0.9725, 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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