The euro slipped back towards five-week lows against the dollar and the yen on Thursday, undermined by soaring yields at a Spanish bond auction that fuelled concerns about debt contagion and drove investors to safe-haven currencies. Spain paid more to sell 10-year government bonds than at any time since 1997, when it still used the peseta, while a separate auction saw two- and four-year borrowing costs for AAA-rated France jump by around half a percentage point.
The sales came at a critical phase of the debt crisis now threatening to ensnare France and other core eurozone states like the Netherlands and Finland, boding ill for the euro. Sentiment towards eurozone assets is at best brittle, but with most investors already running bearish euro positions, the room to bet even more heavily on a drop is limited. The euro was flat on the day $1.3470, not far from a five-week low of $1.3421 struck in the Asian session. It fell to $1.3544 from around $1.3575 immediately after the Spanish auction results before rebounding slightly.
Helping the euro off recover some ground, Italy's newly-installed Prime Minister Mario Monti said the country would fully implement austerity measures agreed by the previous government and may consider additional steps. Offers are cited at $1.3510-15 while reported option expiries at $1.3500 and $1.3440 could dictate price action and were likely to leave the euro hemmed within its recent range.
Against the yen, the euro touched a five-week low of 103.40 at one point, and was last at 103.73 yen, flat on the day. The outlook for eurozone assets took another beating after rating agency Moody's downgraded 12 German public sector banks, while peer Fitch warned it may downgrade its outlook for US banks because of contagion risks from Europe.
Increased preference for safe havens saw the dollar index trade 0.4 percent higher on the day at 78.303. The dollar rose to a one-month high against the Swiss franc, advancing to 0.92370 francs on trading platform EBS, with speculation the Swiss National Bank would intervene in the currency market, weighing on the franc. But the dollar underperformed the yen, and was down 0.1 percent at 76.99 yen. The high-yielding Australian dollar hit a five-week low of $1.0021 at one point, and was last 0.4 percent lower on the day at $1.0042.