The euro’s foreign exchange rate weakened against the US dollar, UK sterling and most major currencies on Wednesday after a German Bund auction found muted but adequate demand, and looked vulnerable to selling by investors nervous about euro zone sovereigns’ ability to attract funding.
Many analysts described the German 10 year auction as not particularly impressive, although it was an improvement on a similar debt sale in November which had raised fears the bloc’s debt crisis was spreading its strongest economy.
Investor appetite to buy euro zone government debt will be further tested when France sells bonds on Thursday, and at Spanish and Italian auctions next week. Markets are particularly concerned about Italy’s ability to cover around 100 billion euros of redemption and coupon payments falling due in the first four months of the year.
The euro slid 0.5 percent to $1.2981, close to a session low of $1.2976, triggering reported stops below $1.3010.
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“All in all the auction was a slight disappointment, therefore the reaction is a little bit of risk aversion. Now the market is looking ahead to the auction from France tomorrow,” said Niels Christensen, FX strategist at Nordea.
Nordea expects the euro to fall to $1.20 by the end of 2012, and Christensen said it would remain vulnerable against the dollar, sterling and yen, although positioning meant euro selling was struggling to gain momentum.
Data last week showed currency speculators boosted bets against the euro to a record high in the week ending Dec. 27.
Some market players said euro weakness was partly due to investors booking profit on a short-covering rally on Tuesday when the single currency rose to a one-week high of $1.3077.
Euro zone economic data also tempered risk appetite on Wednesday. The latest set of purchasing managers’ indexes (PMIs) suggested the region is firmly on course for a moderate recession, even though the composite PMI reading was slightly better than expected.
Against the yen, the euro’s foreign exchange rate was down 0.4 percent at 99.62 yen, holding above the decade low of 98.71 hit in holiday thinned trade on Monday.