Euro slumps on alarm signals from eurozone bond market

LONDON: The euro fell sharply against the dollar on Monday and the eurozone sovereign debt market rang a string of loud alarms that the eurozone debt crisis is in the process of sucking in Italy and Spain.

It was a bad, even black, day for eurozone financial markets which sent signals helter skelter that the debt crisis could be reaching a threshold of contagion, just as eurozone ministers were meeting, ostensibly to sort out crippling differences on how to structure a second rescue for Greece.

At the end of the day, the euro stood at 1.4028 dollars, having slipped at one point below 1.40 for the first time for seven weeks, from 1.4258 at the close on Friday.

Borrowing rates for Italy and Spain rose to the highest levels since the eurozone was created, and in the case of Spain to the highest level since 1997.

The biggest strains for the eurozone appeared in the market for debt issued by governments, with the litmus test of the spread between borrowing rates for Germany and France widening to a record gap, as investors switched into German debt for safety.

The Swiss franc also surged as a haven for funds seeking shelter.

The euro fell against the yen to 112.74 yen from 114.90 on Friday.

The dollar fell to 80.37 yen from 80.55.

At CMC Markets, analyst Michael Hewson said: "The single currency has been absolutely battered today as European leaders struggle to stem the loss of confidence that they will be able to come up with a solution to the current sovereign debt crisis.

"The news that EU leaders could be considering some form of default scenario for Greece has sent bond yields in Spanish and Italian 10-year paper (bonds) through the roof."

And at Rabobank, analyst Jane Foley commented that the euro was under pressure "as the market watches contagion tightening its grip on the Italian bond market."

She said that "as (bond) yields rise and debt financing costs become even more exaggerated, the difficulties of containing the crisis become even bigger."

And at FXCM, analyst Ilya Spivak said: "Confidence is sinking as investors already reeling from Friday’s deeply disappointing US jobs report are confronted with a sharp jump in the Chinese CPI (consumer price index)."

Another central factor was "the spread of the eurozone debt crisis to Italy, a country too big to be bailed out with the existing (EU) EFSF rescue fund.

The head of sovereign risk at IHS Global Insight, Jan Randolph, said: " What this really is about is a crisis of confidence -- in the ability of European policymakers, namely for the two most powerful institutions, the European Central bank and the Berlin government, to get to grips with the debt problem in their periphery."

In Paris, the head of interest rate management at Swiss Life Gestion Privee, Laurent Geronimi, commented: "It is a very worrying situation because if Spain is attacked, the international community will not be able to save this country as it did for Greece, Portugal and Ireland."

In Italy the yield on 10-year debt rose to 5.5 percent, and the yield on Spanish debt surged to slightly more than 6.0 percent.

The closely watched difference between the rates at which Germany and France borrow widened to a record gap of 65.6 basis points. The yield on the 10-year benchmark German bund fell to 2.707 percent as funds flowed in. The rate for French 10-year debt was 3.360 percent.

The Swiss franc rose to 1.1713 francs for one euro having reached a record earlier of 1.1672, and it rose to 0.8349 francs for one dollar.

Sterling rose to 88.08 pence for one euro but fell to 1.5927 dollars.

The price of gold was at 1,555.50 dollars an ounce from 1,541.50 dollars on Friday.

The yuan was at 6.4671 to the dollar from 6.4648.

Copyright AFP (Agence France-Presse), 2011