Euro hit by Spain worries; dollar gains

LOS ANGELES (MarketWatch) — The euro touched a two-week low Wednesday ahead of key events in Spain that are tied to Europe’s efforts in curbing its long-running debt crisis.

EURUSD -0.28% The U.S. dollar, meanwhile, strengthened against most rival currencies, though it briefly pared some of its gains after data on U.S. home sales.

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The euro EURUSD -0.28%   traded at $1.2859, down from $1.2899 late North American trading Tuesday, and reached its lowest level in about two weeks.

Spain’s financial troubles have come “back into the market’s focus in way that’s been certainly more stressful for the Spanish bond market, the euro-zone peripheral bond markets and, by extension, the euro,” said Robert Lynch, a currency strategist at HSBC.

Spain’s borrowing costs jumped Wednesday, with yields on 10-year government bonds ES:10YR_ESP +0.07%climbing above 6% a day before the government was set to announce a new reform package and a budget likely to include more austerity measures.

Strategists at BNP Paribas told clients that investors were “likely to stay on the sidelines in anticipation of the release of the 2013 budget, reforms and the bottom-up banking sector review,” due on Thursday and Friday. See slide show of protests as Spain confronts austerity.

Results of stress tests for Spanish banks are due Friday, as is a review of Spain’s credit rating by Moody’s Investors Service, with a downgrade of Spain’s debt to junk status a possibility.

The euro also came under pressure after Spain’s central bank issued a downbeat view of the pace economic growth in the third quarter.

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As part of economic reforms, the Spanish government will aim to make it more difficult to retire before the mandated age of 65, Spain’s Prime Minister Mariano Rajoy said in an interview with The Wall Street Journal published late Tuesday. He couldn’t say if the government will request a bailout, adding that any such move would depend on the conditions attached to a rescue package, according to the report.

Protests and a general strike in Greece “the IMF telling the [European Union] to take a haircut on Greek debt and the meeting overnight where the Dutch, German and Finnish ministers question[ing] the validity of the bank bailout agreement for Spain,” were also at play in the currency markets, said Wojtek Zarzycki, chief investment officer of Optimal Investing, in emailed comments.

On the euro’s retreat, “keep in mind that the euro had rallied quite a lot from late July through roughly the first third of September, leaving it more vulnerable to these type of sentiments,” said Lynch at HSBC. “The same thing could be said about [Spanish] bond yields, which had more than halved from their peaks in late July.”

DXY at 80?

The ICE dollar index DXY +0.30% , which measures the greenback against a basket of six major currencies, traded at 79.840, up from 79.673 late the previous day, but pulled back from stronger levels following a report that sales of newly built homes in the U.S. fell slightly in August as prices rose a record 11.2%. Demand remained at a two-year high.

Sales of new homes dipped to an annual rate of 373,000 in August, according to the Commerce Department. Economists polled by MarketWatch had forecast sales to rise to a seasonally adjusted 380,000. Read about new home sales figures for August,

“I think we saw a bit of profit-taking with the slightly softer sales data,” said Zarzycki. “The dollar has been gaining quickly the last while so I think some people are taking some profits before the end of the month and looking to see how things evolve in Europe.”

And “based on the growing worries about Europe, we tend to think a DXY at 80 is likely this afternoon,” said Richard Hastings, macro strategist at Global Hunter Securities, “keeping in mind that 80 is still a very low level” on a historical basis.

The greenback turned higher Tuesday after Charles Plosser, president of the Philadelphia Federal Reserve, said the Fed’s third round of bond purchases, which is aimed at stimulating economic activity, may not be effective. 

“It already appears as though the impact of recent central bank announcements is fading fast to be replaced by renewed global growth fears and yet more concerns about the lack of traction in delivering solutions to the fiscal crisis in Europe,” said Mitul Kotecha, head of global foreign exchange strategy at Credit Agricole.

In other action, the British poundGBPUSD -0.19% fell to $1.6148 from $1.6188 on Tuesday.

Against the Japanese yenUSDJPY -0.12% , the dollar edged down to ¥77.75 from ¥77.79 in late trading on Tuesday.

The Australian currency AUDUSD -0.35% slipped to $1.0343, from $1.0451 late the previous session.