Euro falls for 3rd day on nagging funding worries

Thu Apr 19, 2012 9:36am EDT
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By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The euro fell for a third straight session against the U.S. dollar on Thursday despite a decent Spanish bond sale as investors remained skeptical about funding issues in the euro zone.

The euro also tracked the rise in credit default swaps and the widening of yield spreads between the safe-haven German bunds and peripheral fixed income debt, suggesting growing nervousness about liquidity in the financial system and sustainability of the region's debt.

"This is all emblematic of the fact that the market remains very nervous about the state of credit in the euro zone," said Boris Schlossberg, director of FX research at GFT Forex in Jersey City.

"Despite the fact that we had a decent Spanish bond auction, there is just basic skepticism not only about the sovereign debt market but also the health of the overall banking system, particularly in Spain."

Spain's Treasury issued 2.5 billion euros in two- and 10-year bonds, at the top end of the targeted amount. Yields on the key 10-year bond were higher, however, reflecting fears that Spain may miss budget deficit targets and about its banking sector.

The euro dropped 0.2 percent to $1.3087 after hitting a session low of $1.3068, reversing gains that took the single currency to $1.3164 following the Spanish auction.

Traders said they were inclined to sell into any euro rallies, with the rise in Spanish and Italian yields undermining any optimism from the auction. Market talk of a French downgrade also undermined sentiment towards the common currency.

The euro also modestly sold off after a report showed that U.S. initial jobless claims were weaker than expected, which slightly dampened risk appetite.   Continued...

People are reflected on an electronic board displaying exchange rates in a business district in Tokyo February 27, 2012. REUTERS/Toru Hanai