Euro falls under $1.30 despite Portugal bond boost

January 12, 2011 12:00 am

, LONDON, Jan 12, 2011 – The European single currency dipped back under 1.30 dollars on Wednesday, despite upbeat news of a successful bond auction in debt-laden Portugal, analysts said.

Approaching midday in London, the euro fell to 1.2966 dollars after breaching 1.30 dollars in response to news of record annual economic growth for Germany. The euro was at 1.2974 dollars in New York late on Tuesday.

Portugal paid lower rates on long-term debt on Wednesday as it raised 1.25 billion euros (1.62 billion dollars) in a critical test for its credibility and that of the wider eurozone in the financial markets.

The Portuguese debt agency said the yield or the rate of return for investors in the bonds maturing in June 2020 came in at 6.716 percent, down from 6.806 percent at a similar sale in November.

"Portugal\’s debt auction has been a success," said research director Kathleen Brooks at online trading site

"While this may placate investors for now… it could be a volatile afternoon in the foreign exchange markets."

The bond sale was seen as a key test of Lisbon\’s ability to continue to raise funds on the financial markets after its debt and deficit problems forcing it to pay high rates to get the cash, with some analysts suggesting it would need a bailout like Greece and Ireland last year.

"The Portuguese auction was well received," said RIA Capital Markets analyst Nick Stamenkovic.

"Not only did the Portuguese Treasury get away the maximum amount planned but the yield was lower than November. This should prompt a relief rally for Portuguese sovereign bonds."

The vital auction marked a new chapter in the eurozone debt crisis as the nation seeks to avoid a bailout loan from the European Union and the International Monetary Fund.

Lisbon is beset by speculation that its eurozone partners want it to accept a bailout to avert a wider crisis which could drag down others, including Spain, after Greece and Ireland were both given huge EU/IMF loans last year.

"With the resurgence of sovereign debt fear seemingly timed to play out on Portugal now, few probably care whether the government believes that it needs bailout help or not," said BGC Partners analyst Howard Wheeldon.

"The point is that despite the yield on the latest auction today being 6.716 percent, compared to the 6.806 percent paid at previous auction last November, markets have already decided that Portugal requires help and that is an end of it.

"Never go against markets is a golden rule that governments ignore at their peril," he warned.

Last Friday, investors had pushed Portugal\’s 10-year bond yields up to a record 7.193 percent, an interest rate most analysts consider prohibitive.

Prior to the auction, China and Japan signalled that they would buy substantial slices of the issue. Spain and Italy are meanwhile set to sell bonds on Thursday.

In London on Wednesday, the euro changed hands at 1.2966 dollars against 1.2974 dollars late in New York on Tuesday, at 107.90 yen (108.00), 0.8314 pounds (0.8310) and 1.2594 Swiss francs (1.2630).

The dollar stood at 83.22 yen (82.23) and 0.9712 Swiss francs (0.9737).

The pound was at 1.5593 dollars (1.5610).

On the London Bullion Market, the price of gold rose to 1,383.50 dollars an ounce from 1,374 dollars late on Tuesday.


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