July 30th, 2012

The euro fell for the first time in four days against the dollar and yen after Spain’s recession deepened, adding to concern the region’s fourth-largest economy will struggle to bring down its debt levels.

The 17-nation currency dropped from near a two-week high versus the yen after a European report showed economic sentiment worsened more than analysts forecast. The European Central Bank announces its next policy decision on Aug. 2 amid speculation President Mario Draghi will signal additional measures to ease the debt crisis. Sweden’s krona rose against all its major counterparts as the economy expanded more than analysts predicted. The pound fell as U.K. mortgage approvals dropped.

“The euro is still looking fragile,” said Niels Christensen, chief currency strategist at Nordea Bank AB in Copenhagen. “The bias is a little bit that the ECB will not do as much as the market is hoping for, so Thursday could be a disappointment.”

The euro dropped 0.5 percent to $1.2265 at 7:10 a.m. New York time, after strengthening 1.4 percent last week. The single currency declined 0.7 percent to 95.95 yen after climbing to 97.34 on July 27, the strongest level since July 17. The yen gained 0.3 percent to 78.22 per dollar.

Spain’s gross domestic product shrank 0.4 percent last quarter from the previous three months when it fell 0.3 percent, the National Statistics Institute said in Madrid, confirming the Bank of Spain’s estimate published on June 23. An index of executive and consumer sentiment in euro area dropped to 87.9 this month from 89.9 in June, the European Commission said in Brussels. That’s the lowest since September 2009.
Consumer Sentiment

The euro may weaken to $1.20 over the next three months as the economic slump deepens, Nordea Bank’s Christensen said. Analysts surveyed by Bloomberg predict the currency will end 2012 at $1.23.

Draghi sparked a euro rally last week by pledging to do whatever it takes to preserve the currency, suggesting policy makers may intervene in bond markets. He is due to meet U.S. Treasury Secretary Timothy Geithner today as he attempts to win over Bundesbank President Jens Weidmann on measures to ease the region’s debt woes.

The ECB president’s proposal involves the European Financial Stability Facility buying government bonds in the primary market, buttressed by ECB purchases on the secondary market to ensure transmission of its record-low interest rates, two central bank officials said July 27 on condition of anonymity. Further rate cuts and long-term loans to banks are also up for discussion, one of the officials said.

Euro Futures: Draghi’s Proposal

While the ECB’s commitment to preserve the euro is necessary, it’s not sufficient by itself to resolve the debt crisis, Moody’s Investors Service said in a report.

The euro has weakened 3.2 percent in the past month, the worst performer of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar rose 0.3 percent and the yen gained 2.5 percent.

“The euro will continue to struggle,” said Daisaku Ueno, a senior currency and debt strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “To resolve Europe’s debt crisis, monetary policy will have to bear a lot of the burden.”

Sweden’s krona climbed as much as 1.5 percent to 8.3370 against the euro, its strongest level since September 2000. The currency rose for a fourth day against the dollar, gaining 0.9 percent to 6.8067.

The Swedish economy grew 1.4 percent in the quarter through June, after advancing a revised 0.9 percent the previous three months, Stockholm-based Statistics Sweden said. Annual growth was 2.3 percent, up from 1.5 percent in the first quarter.

British Pound Falls

The pound declined for the first time in three days against the dollar, losing 0.3 percent to $1.5706. Sterling weakened 0.6 percent to 122.89 yen.

U.K. lenders granted 44,192 loans to buy homes, compared with a revised 50,544 the previous month, the Bank of England said. That’s the lowest since December 2010. A separate report showed retail sales slowed in July.

Demand for the dollar was tempered before the Federal Reserve starts a two-day meeting tomorrow amid speculation the central bank will signal additional stimulus.

Fed Chairman Ben S. Bernanke said this month policy makers are “looking for ways to address the weakness in the economy should more action be needed to promote a sustained recovery in the labor market.” While the central bank refrained from introducing a third round of asset purchases at its June meeting, Bernanke indicated it’s an option.

Jobless Rate

The pace of hiring in July failed to reduce the U.S. jobless rate, which has been stuck above 8 percent for more than three years, economists said before data this week. The median forecast of economists surveyed by Bloomberg is for an increase in payrolls of 100,000 workers when the Labor Department releases its report on Aug. 3. That would leave the unemployment rate unchanged at 8.2 percent.

“The Fed is likely to continue to indicate that it’s ready to introduce additional monetary easing,” Mitsubishi UFJ’s Ueno said. “Monetary easing from the Fed is positive for stocks, and the dollar is susceptible to being sold on risk-on sentiment.”

- Lukanyo Mnyanda in Edinburgh and Mariko Ishikawa in Tokyo at Bloomberg.