Euro Declines on Italian Debt Fears

The euro fell Tuesday after a report cast doubt on the possibility of China buying a significant amount of Italian debt in order to buoy the sinking economy.

The euro hit a session low of $1.3557 after Market News International reported that Beijing may not buy Italian debt. Earlier in the day, the euro climbed to $1.3696 following news late yesterday that Italy was talking with China about the possibility of buying significant quantities of Italian bonds and investments in strategic companies. On Monday, the euro fell as low as $1.3495, its weakest against the U.S. dollar since February, and fell to 103.90 yen, its weakest in ten years. Today, the euro has climbed slightly to 104.41 yen.

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Though the euro had begun to recover from its low earlier today, it is now under more selling pressure on news that Italy paid higher borrowing costs to sell a new five-year bond, indicating that “demand for Italian paper has weakened…so the euro should struggle to extend any gains,” said Valentin Marinov, currency strategist at Citi.

Italian borrowing costs rose today at a 6.5 billion-euro bond auction in which the Rome-based Treasury sold 3.9 billion euros of new benchmark five-year bonds with a 5.6% yield, up from the 4.93% yield on similar-maturity securities sold on July 14. Demand was 1.28 times the amount offered, down from 1.93 times the amount offered at the July auction. Also selling 2.6 billion euros of bonds maturing in 2018 and 2020, the Treasury ultimately fell short of its maximum target of 7 billion euros. After the auction, the euro declined to $1.3615.

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However, the euro was little changed against the safe-haven Swiss franc at 1.2030 francs, remaining just above the 1.2000 minimum the Swiss central bank vowed to defend. Meanwhile, the U.S. dollar rose 0.3% to 0.8830 franc, though it was down 0.2% against a basket of major currencies. Both the Australian and New Zealand dollars struggled against their American counterpart, while the Swedish and Norwegian crowns both remained weak after falling sharply against the euro on Monday. All four currencies are considered to be relatively high risk, and tend to track the broad health of the global economy, which means they tend to decline in times of uncertainty.