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Euro Declines on Europe Political Concern; Yen Touches 2010 Low

Feb. 4 (Bloomberg) -- The euro fell the most in almost three weeks against the dollar as Italian and Spanish bonds slumped amid political turmoil, damping demand for the shared currency.

The 17-nation euro dropped versus the majority of its 16 major peers as Spanish Prime Minister Mariano Rajoy faced calls to resign after newspaper reports alleged he accepted illegal cash payments. A poll showed former Italy Premier Silvio Berlusconi closed the gap on front-runner Pier Luigi Bersani even as he appeals a four-year prison sentence for tax fraud. The yen weakened beyond 93 per dollar for the first time since May 2010. European Central Bank policy makers meet this week.

The political uncertainty in Spain and Italy has “provided a convenient excuse for investors to take some profit off the table,” Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, said in a telephone interview. “The broader theme for the euro is caution ahead of the ECB meeting this week.”

The euro declined 0.8 percent to $1.3538 at 12:46 p.m. in New York after falling as much as 0.9 percent, the biggest decline since Jan. 15. The common currency slipped 1 percent to 125.40 yen. The yen rose 0.2 percent to 92.62 per dollar after sliding to 93.18, the weakest level since May 13, 2010.

Rand, Ringgit

The rand lost 0.9 percent to the dollar as South Africa posted a trade gap of 32 billion rand ($3.6 billion) in the fourth quarter amid slowing global growth and mining strikes that curbed exports. The currency weakened to 8.9156 to the greenback.

Malaysia’s ringgit appreciated the most in a month as recent losses were judged excessive. It fell last week the most against the dollar in 16 months on speculation Prime Minister Najib Razak will call an early election that may weaken the coalition’s grip on power. The ringgit advanced 0.7 percent to 3.0950 per dollar.

South Korea’s won rose the most in 14 months against the dollar after U.S. and Chinese reports added to signs of recovery in the world’s largest economies. Bank of Korea board member Moon Woo Sik said it’s too early for any central bank response to the yen’s slide against the won. The won appreciated 1.2 percent to 1,084.78 per dollar.

ECB Outlook

The ECB, which has held its main refinancing rate at 0.75 percent since July, will make no change at its next policy decision on Feb. 7, according to the median forecast of 58 economists surveyed by Bloomberg. Central-bank President Mario Draghi may make more dovish remarks at the meeting without the central bank altering policy, according to analysts.

“I don’t think we’re there yet,” Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York, said of an interest-rate cut in a Bloomberg Radio interview with Tom Keene. “If we enter a new macroeconomic environment with lower growth and unemployment rising, policy leaders will resort to more aggressive tactics. We’re not at that point yet.”

Spain’s 10-year bond yield climbed as much as 23 basis points, or 0.23 percentage point, to 5.43 percent, the highest since Dec. 18. Rajoy, who said the allegations published in Spain’s biggest newspaper El Pais are unfounded, travels to Berlin today to meet German Chancellor Angela Merkel.

Italian 10-year yields jumped as much as 15 basis points to 4.47 percent. The additional yield investors demand to hold the securities instead of German bunds increased for a fourth day after Prime Minister Mario Monti said the spread may widen if Berlusconi, who also is standing trial on charges he paid a minor for sex, is elected this month.

Euro Forecasts

Barclays Plc raised its forecasts for the euro against the dollar to take into account gains that pushed the shared currency to the strongest level since November 2011 last week. The euro will drop to $1.32 in six months and $1.28 in a year, higher than from previous estimates of $1.26 and $1.22, strategists Raghav Subbarao and Guillermo Felices in London wrote today in a note to clients.

The euro will fall to $1.30 by year-end, according to the median of 60 estimates compiled by Bloomberg. Implied volatility from options trading shows the chance of it ending the year below that level is 28 percent.

The yen fluctuated against the dollar after a record 12 straight weeks of declines as Prime Minister Shinzo Abe’s administration presses the central bank to ease monetary policy further to beat deflation.

‘Next Catalyst’

Finance Minister Taro Aso said yesterday the government is imitating his Depression-era predecessor, Korekiyo Takahashi, who told the Bank of Japan to underwrite government debt to fund deficit spending.

“Eventually, the yen will rise toward 98, probably 100,” said Westpac’s Franulovich. “The next catalyst is in April when the next BOJ governor is announced. The asset purchases starting early next year should open the flood gates for more yen selling.”

The yen tumbled 16 percent over the past three months, the biggest decline among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 4.4 percent and the dollar dropped 1.7 percent.

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