Euro 3-week low

Euro at 3-week low as Spain worries intensify

Shared currency falls under floor set against the Swiss franc

MarketWatch,

5 April, 2012

The dollar rose to a three-week high against the euro and other major currencies on Thursday as turmoil in Spanish bond markets revived worries about the region’s debt crisis.

The euro also broke through a trading floor set by the Swiss National Bank last September.

The ICE dollar index DXY -0.26% , which measures the greenback’s performance against a basket of six currencies, rose to its highest level in three weeks — 80.101, from 79.764 late Wednesday.

The euro EURUSD +0.0052% fell to $1.3060, down from $1.3139 Wednesday. The shared currency hasn’t closed under $1.31 since March 15.

A renewed rise in Spanish and Italian bond yields in recent days has put pressure on the euro, which had rallied since the start of the year as market fears eased in the wake of the European Central Bank’s massive long-term refinancing operations.

Yields on Spain’s 10-year government bonds ES:10YR_ESP 0.00% rose to 5.78%, their highest level since December. The yield premium demanded by investors to hold the bonds over benchmark 10-year German bunds — a measure of the risk associated with Spanish debt — widened 0.18 of a percentage point to 4.03 percentage points. That’s the widest spread since late November. See more on Spanish bond yields.

“The unresolved nature of the European debt crisis also rose in significance as Spanish bond yields have now returned to levels seen around the time of the first LTRO, despite what has been advertized as the most austere budget since [dictator Francisco] Franco,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

Italy’s 10-year yields IT:10YR_ITA 0.00% rose as high as 5.54%, their loftiest level since mid-February.

That the rise “in yields comes within days of the European finance ministers’ agreement to increase the firewall must be particularly disappointing to officials,” Chandler said.

Last Friday, euro-zone finance ministers agreed to temporarily boost the lending capacity of the region’s rescue funds to 700 billion euros ($934 billion) from €500 billion. Read story on euro-zone’s firewall.

Dollar gains

The dollar extended gains Thursday after a government report showed U.S. initial jobless claims slipped to 357,000 in the latest week. The average of new claims over the past four weeks, seen as a better indicator of the trend, fell to the lowest level since April 2008. Read about U.S. jobless claims.

“We believe that the economy has entered a more self-sustaining phase of the recovery with stronger job creation,” John Ryding and Conrad DeQuadros, economists at RDQ Economics, wrote in a note.

That could lead to a change in expectations of when the Federal Reserve will raise interest rates. Rising Fed rates would be positive for the dollar.

Better U.S. economic data are in sharp contrast to the outlook for Europe, where analysts expect a recession as many governments slash spending to rein in debt.

The claims report comes a day before one of the most closely followed U.S. economic releases: the Labor Department’s nonfarm payrolls report for March. Many stock markets will be closed for Good Friday and U.S. bond markets are expected to only be open for a few hours around the release. That’s likely to result in low trading volumes and higher volatility in currency markets, potentially distorting the market’s reaction to the data.

Against the Japanese yen, the euro EURJPY -0.0212% fell 0.7% to ¥107.62. The dollar USDJPY +0.0154% also slipped, buying ¥82.42, down from ¥82.57 late Wednesday.

Swiss franc, British pound

The Swiss franc was in focus, as the euro briefly broke below the floor set by the Swiss National Bank — 1.20 Swiss francs. Read more about euro, Swiss franc.

The central bank set the trading floor last September to halt a rise in the currency, traditionally a safe haven, that it was feared would lead to a deflationary spiral.

While a Swiss National Bank spokesman declined to comment Thursday on reports the central bank had intervened to buy euros, he reiterated the bank’s pledge to defend the CHF1.20 floor with “utmost determination,” also saying it was prepared to buy currencies in “unlimited quantities.”

The euro traded at 1.2022 francs EURCHF +0.0004% , paring a decline to 0.1% from Wednesday. Strategists said the euro traded as low as CHF1.1990 earlier Thursday.

“The fact that the [Swiss National Bank] hasn’t been active in the markets for months could mean that the strength of its resolve is tested. But in an environment of heightened sovereign concerns, the safe havens like the Swissie are going to do well,” said Kathleen Brooks, research director at Forex.com.

The British pound GBPUSD +0.0070% traded at $1.5829, down from $1.5890 Thursday. The Bank of England decided Thursday to leave monetary policy unchanged, as expected. Read about Bank of England on hold.