The euro weakened to a decade low against the yen and bond risk rose on concern that Europe’s debt crisis would slow the global economy.
The euro weakened as much as 0.5 percent against the yen before trading at ￥100.50 as of 4:05pm in Tokyo yesterday. The Markit iTraxx Japan index tracking debt-default risk added three basis points to 187.
“The European problem is going to continue to cause spooks in the market and some spikes in risk aversion,” said Thomas -Averill, managing director in Sydney at Rochford Capital, a currency and interest-rate risk-management company. “The moves are exaggerated by the lack of liquidity.”
The euro slid for a fifth day against the yen and earlier reached ￥100.36, the weakest level since June 2001. The 17-nation currency zone slipped 0.1 percent to US$1.2932 after earlier touching US$1.2888, the lowest since Jan. 10.
Italy was to sell as much as 8.5 billion euros (US$11 billion) in notes due from 2014 to 2022, a day after borrowing costs fell at a bill -auction. The European Central Bank (ECB) said on Wednesday its balance sheet soared to a record 2.73 trillion euros after lending to banks last week.
The ECB last week awarded 523 banks three-year loans totaling a record 489 billion euros to encourage lending. So far, banks are parking the money back at the ECB. Overnight deposits at the central bank increased to an all-time high of 452 billion euros on Wednesday.
“The ECB, for the foreseeable future, will not drain liquidity once per month as it always has done,” said Robert Rennie, Sydney-based chief currency strategist at Westpac Banking Corp, Australia’s second-largest lender. “It gives you greater confidence that this is more formal quantitative easing. Both on an outright and a cross basis, the risks still do lie to the downside for the euro.”
Meanwhile, strong demand for short-term Italian government debt has pushed the country’s borrowing costs lower and suggested investors have become less jittery about an imminent default by the eurozone’s third-largest economy.
Italy raised 10.7 billion euros on Wednesday in a pair of auctions at sharply lower rates than those it was forced to pay just a month ago when investor concerns over the ability of the country to service its massive debts became particularly acute and effectively prompted a change in government.
The sharp decline in Italy’s borrowing costs could be a signal that commercial banks in the eurozone diverted some of the money they tapped from emergency loans from the ECB last week to buy the bonds of heavily indebted governments. It could also suggest rising investor confidence in Italy’s recent efforts to reduce its long-term debt through a variety of austerity measures.
The Bank of Italy said the average yield on its 9 billion euros six-month bill offering was 3.251 percent, half the 6.504 percent rate it had to pay at the equivalent auction last month. An auction of two-year bonds, which raised 1.7 billion euros, also saw the yield fall to 4.853 percent from 7.814 percent last month.
“This is an encouraging development, suggesting that the Italian sovereign debt market has pulled back from the dangerous situation in late November,” said Raj Badiani, a senior economist at IHS Global Insight.
“The calmer environment reflects the passing of additional austerity measures and some welcome progress on the structural reform agenda, coupled with the ECB’s decision to provide additional cheap financing to Italian banks,” he added.