Forex: Monday’s review

The euro fell the most in two weeks against the dollar as Italian and Spanish bonds slumped amid political turmoil in the euro-area’s third- and fourth-largest economies, damping demand for the shared currency. The 17-nation euro dropped versus the majority of its 16 major peers as Spanish Prime Minister Mariano Rajoy faced calls to resign after newspaper reports alleged he accepted illegal cash payments. A poll showed former Italy Premier Silvio Berlusconi closed the gap on front-runner Pier Luigi Bersani even as he appeals a four-year prison sentence for tax fraud.

Spain’s 10-year bond yield climbed as much as 23 basis points, or 0.23 percentage point, to 5.43 percent, the highest since Dec. 18. Rajoy, who said the allegations published in Spain’s biggest newspaper El Pais are unfounded, travels to Berlin to meet German Chancellor Angela Merkel.

Italian 10-year yields jumped as much as 15 basis points to 4.47 percent. The additional yield investors demand to hold the securities instead of German bunds increased for a fourth day after Prime Minister Mario Monti said the spread may widen if Berlusconi, who also is standing trial on charges he paid a minor for sex, is elected this month.

Barclays Plc raised its forecasts for the euro against the dollar to take into account gains that pushed the shared currency to the strongest level since November 2011 last week. The euro will drop to $1.32 in six months and $1.28 in a year, higher than from previous estimates of $1.26 and $1.22, strategists Raghav Subbarao and Guillermo Felices in London wrote in a note to clients.

The yen weakened beyond 93 per dollar for the first time since May 2010. European Central Bank policy makers meet this week. The ECB, which has held its main refinancing rate at 0.75 percent since July, will make no change at its next policy decision on Feb. 7. Central-bank President Mario Draghi may make more dovish remarks at the meeting without the central bank altering policy, according to analysts.

The yen fluctuated against the dollar after a record 12 straight weeks of declines as Prime Minister Shinzo Abe’s administration presses the central bank to ease monetary policy further to beat deflation. Finance Minister Taro Aso said yesterday the government is imitating his Depression-era predecessor, Korekiyo Takahashi, who told the Bank of Japan to underwrite government debt to fund deficit spending.

The pound retreated from its weakest level in 15 months against the euro, as the political turmoil, the growth yield of Spanish and Italian government bonds increased the relative attractiveness of the UK currency. Exchange rate increased, despite the fact that one of the report published today showed that activity in the UK construction sector continued to decline in January, which is fixed for the third month. Economists say that this dynamic is primarily associated with a reduction in the number of new orders. According to the data, the index of business activity in the construction sector was 48.7 in January, unchanged from the previous month. Note that this value is a minimum of six months. The data also showed that the number of new orders in the sector continued to decline in January, registering with the 8th monthly fall. However, the rate of decline was the slowest since October 2012.