FOREX-Euro falls on Spain worries, rising bond yields

by on September 26, 2012 11:23 am GMT

Wed Sep 26, 2012 7:23am EDT

* Uncertainty over Spanish bailout request unnerves market

* Spanish 10-year borrowing costs rise above 6 percent

* Support for euro expected around $1.2826

* Bank of Spain warns of significant fall in GDP in Q3

By Jessica Mortimer

LONDON, Sept 26 (Reuters) – The euro fell to a two-week low
against the dollar and the yen on Wednesday, dragged lower by
rising Spanish borrowing costs as uncertainty grew over when
Spain might request a bailout.

Worries about Spain increased as the Bank of Spain said the
economy fell “at a significant rate” in the third quarter and
after protesters clashed with police in Madrid on Tuesday before
the government’s 2013 budget, due on Thursday.

The unrest highlighted the challenges facing the euro zone’s
fourth largest economy as it struggles to control its debts. The
country’s 10-year bond yields topped 6 percent on
Wednesday for the first time in a week.

The euro was last down 0.3 percent at $1.2863, having
earlier hit $1.2848, its lowest since Sept. 12.

An aid request by Spain is a condition for the European
Central Bank to start buying its debt. Madrid’s apparent
reluctance to seek help has dented demand for the euro in recent

“The more jittery the market gets about when Spain will seek
aid the higher yields will go … The key will be whether Spain
asks for a bailout before their yields surge,” said Paul Robson,
currency analyst at RBS.

Prime Minister Mariano Rajoy told the Wall Street Journal in
an interview published on Wednesday he was ready to seek a
bailout if Spain’s debt financing costs stayed too high for too

RBS’s Robson said the euro may weaken further over the next
couple of days, after which investors may look to buy it.

The euro has fallen around 2.5 percent since hitting a
four-month high of $1.31729 last week. Further losses could see
it break below chart support at its 200-day moving average
around $1.2826.

“The Spanish story does seem to be deteriorating,” HSBC
currency strategist Daragh Maher said. He said a break below
$1.28, which acted as resistance as the euro rallied earlier
this month, could open the door for further losses.


The euro also fell to a near two-week low against the yen
of 99.71 yen on the EBS trading platform.

The risk of unrest in Greece, where the coalition faced its
first big anti-austerity strike since taking power in June, also
contributed to negative sentiment towards the euro.

The euro has succumbed to profit-taking after rallying
around 9 percent from a two-year low of $1.2042 hit in July,
helped by the ECB bond-buying plan and a third round of monetary
easing from the U.S. Federal Reserve that lifted perceived
riskier currencies against the dollar.

The dollar rose to a two-week high against a basket of
currencies, with the dollar index hitting 79.900.

However, the U.S. currency fell to a near two-week low
against the yen of 77.60 yen on EBS trading platform.

Traders said the yen could get a lift this week from
Japanese fund repatriation before half-year book-closings,
although some market participants said many companies had
already covered their needs so such flows were unlikely to be

More falls in the dollar could see it drop towards 77.13
yen, a seven-month low of hit on Sept. 13, the day the Fed
announced aggressive stimulus to promote economic recovery.