The euro fell to the lowest in almost two years against the dollar as Spain struggled to rescue its troubled banks, adding to signs the European debt crisis is spreading to the region's larger economies.
The 17-nation currency slid for a seventh day versus the yen, the longest losing streak in four months, after Italy sold less than its maximum target at a debt auction. The yen and dollar strengthened as investors sought safer assets after a European report showed economic confidence dropped more than economists estimated in May. Asian currencies weakened, pushing the Bloomberg-JPMorgan Asia Dollar Index toward its worst monthly loss since September.
"Questions about how much does Spain need, who will fund it and also in the meantime can they stop a bank run in Spain, are enormous political hurdles," said Jane Foley, a senior currency strategist at Rabobank International in London. "These will be questions that either make or break the euro zone."
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The euro declined 0.4 percent to $1.2452 at 7:24 a.m. New York time after sliding to $1.2425, the weakest since July 2010. The single currency fell 1 percent to 98.43 yen. It dropped to 98.22 yen, the lowest level since Jan. 18. The yen gained 0.5 percent to 79.06 per dollar.
The European currency has depreciated 5.9 percent against the dollar this month, the most since September, and slid 7.1 percent versus the yen.
"The euro could go lower, maybe it can go down towards $1.20," Foley said. "The question is will the downside risks turn into a downward spiral."
Spain's 10-year bond yield rose as high as 6.70 percent, approaching the 7 percent level that led to bailouts in Greece, Ireland and Portugal, after central bank Governor Miguel Angel Fernandez Ordonez resigned a month early amid criticism over the nationalization of Bankia group.
The euro dropped for a second day against the greenback as Spain backtracked on a plan to use government debt instead of cash to bail out the nation's third-largest lender, while Prime Minister Mariano Rajoy struggles to shore up the nation's lenders without overburdening public finances.
The market is "focusing a little bit more on Spain than the Greek elections at the moment and of course the Spanish bank problems," David Forrester, senior vice president for Group of 10 foreign-exchange strategy in Singapore at Macquarie Bank Ltd., said in an interview with Bloomberg Television. The euro may extend losses toward $1.20, he said.
Italian Sales
The euro has declined 4.3 percent in the past six months, the biggest loser among the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar climbed 4.2 percent, the best performer, while the yen appreciated 2.1 percent.
The yen surged at least 0.5 percent against all 16 of its major peers tracked by Bloomberg after Italian borrowing costs climbed and European confidence plummeted, boosting investor demand for the safest assets.
Italy sold 5.73 billion euros of bonds as yields rose from the previous sale in April. The Treasury auctioned 10-year debt at a rate of 6.03 percent, the highest since Jan. 30. Investors bid for 1.4 times the amount offered, down from 1.48 last month. Italy also sold five-year notes to yield 5.66 percent, compared with 4.86 percent last month.
An index of executive and consumer sentiment in the euro area fell to 90.6 from a revised 92.9 in April, the European Commission said today. That's the lowest since October 2009 and below the 91.9 forecast by economists, according to the median of 28 estimates in a Bloomberg News survey.
The 14-day relative strength index for the euro against the yen was at 20, below the 30 level that some traders see as a sign that an asset price may be about to reverse course.
"Technical indicators are signaling the euro has been oversold," said Kengo Suzuki, a foreign-exchange strategist in Tokyo at Mizuho Securities Co., a unit of Japan's third-largest bank by market value. "Any positive catalyst is likely to trigger a rebound."
The euro will strengthen to 105 yen by year-end, according to the average forecast in a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.
The Asia Dollar Index has lost 2.6 percent this month as exchange data showed global funds pulled $7.7 billion from South Korean, Taiwanese and Indonesian stocks.
"Sentiment toward emerging-market assets remains fragile on concern over the Spanish banking sector," said Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong. "We expect a risk-off environment, with currencies on the defensive and lower rates."
The Australian dollar fell for a second day, dropping 0.6 percent to 97.86 U.S. cents, after a government report showed retail sales unexpectedly slid in April for the first time in 10 months.
Sales declined 0.2 percent from March, when they rose a revised 1.1 percent, the Bureau of Statistics said in Sydney. The median forecast of economists in a Bloomberg News survey was for a 0.2 percent increase.
Bloomberg News
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