Euro drops as business activity stays sluggish

LONDON: The euro fell to a one-week low against the dollar and dropped sharply against the safe-haven yen on Thursday after disappointing euro zone business activity data stoked concerns about a deepening recession in the region.

While German private sector contraction eased in September, based on the purchasing managers' index (PMI) numbers from China and Europe's second-largest economy France were weak. That drove some to shed holdings in riskier assets and currencies for safe-haven government bonds.

The focus turned to on a Spanish bond auction with pressure building on Europe's fourth-largest economy to seek financial aid. Ten-year Spanish borrowing costs briefly topped 6 percent this week and a bad result could hasten a request for a rescue package and provide some relief to the euro, some traders said.

Madrid will sell three-year and 10-year paper in an auction of up to 4.5 billion euros. It has been dithering on seeking a bailout that could allow the European Central Bank to buy its bonds. That uncertainty has seen the euro cede ground.

The euro fell 0.8 percent to $1.29415, off Monday's four-month peak of $1.3173. It dropped through stops at $1.2950, before recovering to trade at $1.2970, still down on the day.

It shed more than 1 percent to 101.07 yen with stop-loss orders cited below 101 yen and was last at 101.50.

The euro hit four-months high against the dollar and yen earlier this week, rising since the European Central Bank said it would intervene in bond markets to lower borrowing costs and the Federal Reserve unleashed a fresh bout of monetary easing.

But the ECB's plan has so far failed to inspire any major improvement in business at euro zone companies.

 "Today's PMI data shows that irrespective of what the ECB has done, the euro zone remains mired in a recession and that will weigh on the euro," said Peter Kinsella, currency strategist at Commerzbank.

"If we see a bad (auction) result today, it will be the final nail to drive Spain to seek help."

While the ECB plan has cut borrowing costs for peripheral states, it requires a country first to seek aid from the region's rescue funds -- a step Spain is still mulling.