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Euro hits ten-year low versus yen on liquidity concerns Italian long term cost of borrowing stays high
(about 1 hour later)
The euro has fallen to a ten-year low against the Japanese yen amid renewed concerns over the eurozone crisis. Italy's long term cost of borrowing has remained high despite a big fall in its short term loan costs on Wednesday.
The euro was trading as low as 100.35 against the yen, its lowest level since July 2001. In Thursday's auction of long-term debt, the interest rate on Italian 10-year bonds was 6.98%.
The troubled single currency also hit a one-year low against the US dollar, hitting $1.2887. It was trading at 0.836 against the British pound. The rate was lower than a previous auction one month ago but still viewed as unsustainably high.
The fall comes ahead of a new long term debt auction by the Italian government, closely watched by investors. Earlier, the euro fell to a ten-year low against the Japanese yen amid renewed concerns about the eurozone crisis.
Italy raised around 7bn euros ($8.96bn, £5.86bn).
The interest rate on long-term borrowing remained high, but was lower than the 7.56% it had to pay at its last auction of 10-year bonds on 30 November this year.
Italy paid 5.62% on new three-year debt, down from the 7.89% paid a month ago.
On Wednesday, the country raised 9bn euros ($11.8bn, £7.56bn) of very short term debt at far lower borrowing costs.
Italy has significant borrowing needs in the new year, including 161bn euros in debt repayments falling due between February and April, all of which it will have to finance through new borrowing.
Bank depositsBank deposits
The latest auction came after the euro fell against major currencies.
The euro traded as low as 100.35 against the yen, its lowest level since July 2001.
The troubled single currency also hit a one-year low against the US dollar, hitting $1.2887. It was trading at 0.836 against the British pound.
This week, banks have deposited record amounts overnight with the European Central Bank (ECB), raising fears of a credit crunch.This week, banks have deposited record amounts overnight with the European Central Bank (ECB), raising fears of a credit crunch.
One interpretation of this increased usage of the ECB's deposit facility is that it reflects nervousness among Europe's banks about lending the money to each other.One interpretation of this increased usage of the ECB's deposit facility is that it reflects nervousness among Europe's banks about lending the money to each other.
"It could be a sign of market tension," said James Ashley a senior economist at the Royal Bank of Canada."It could be a sign of market tension," said James Ashley a senior economist at the Royal Bank of Canada.
"But there are a number of other interpretations. We don't know which banks are depositing and in which size.""But there are a number of other interpretations. We don't know which banks are depositing and in which size."
Some suggest the increased use of the facility is simply a response to recent intervention by the ECB.Some suggest the increased use of the facility is simply a response to recent intervention by the ECB.
The central bank provided European lenders with 489bn euros of its new three-year loans just before Christmas, of which banks used some 200bn euros to repay existing debts. The rest has gone into cash accounts, including the deposit facility.The central bank provided European lenders with 489bn euros of its new three-year loans just before Christmas, of which banks used some 200bn euros to repay existing debts. The rest has gone into cash accounts, including the deposit facility.
Light tradingLight trading
However, falls in the single currency come during a period of relatively light trading on the markets due to the holiday period.However, falls in the single currency come during a period of relatively light trading on the markets due to the holiday period.
With relatively few buyers and sellers a few large trades can have a big impact on the price, as sellers struggle to find prospective buyers.With relatively few buyers and sellers a few large trades can have a big impact on the price, as sellers struggle to find prospective buyers.
"We attribute this [fall] to low liquidity and low trading volume more than anything as it's happened during the holiday season. This isn't anything based on the fundamentals," said Oliver Desbarres, head of FX strategy Asia-Pacific at Barclays."We attribute this [fall] to low liquidity and low trading volume more than anything as it's happened during the holiday season. This isn't anything based on the fundamentals," said Oliver Desbarres, head of FX strategy Asia-Pacific at Barclays.
The fall comes despite Italy's successful debt auction on Wednesday, in which the country raised 9bn euros ($11.8bn, £7.56bn) of short term debt.
The interest on the six-month bills was 3.251%, down from 6.504% at the last similar auction in November.
Italy is set to announce a second auction of long term debt on Thursdaym, which economists say will provide a better indication of the country's ability to borrow.
"The scale of what is required over the next three or four months is vastly greater. [Wednesday's auction] was a positive indication, but we shouldn't necessarily read too much in to that," said Mr Ashley.