German weakness adds to euro’s woes

The euro fell against the dollar yesterday after weak German economic data fuelled concerns about slowing growth in Europe’s largest economy, and looked likely to extend losses on mounting concerns Spain may need a full bailout.

The German purchasing manager index figures came after Moody’s changed its outlook for Germany, the Netherlands, and Luxembourg to negative, warning that Europe’s top-rated countries may have to increase support for indebted states such as Spain and Italy.

Analysts said worries that more Spanish regions will follow Valencia and request financial aid from Madrid would keep Spanish bond yields high and encourage investors to sell the single currency.

Data showing China’s manufacturing output grew at its fastest pace in nine months gave the euro only a brief lift, with the overall trend for the currency remaining strongly negative.

“The China data lifted sentiment at the margin but you have to keep in perspective how big was the [euro’s] bounce. Generally speaking, the trend is down,” said George Saravelos, FX strategist at Deutsche Bank.

“The PMI numbers were weak as expected, and the risk is that the ECB will potentially ease more.”

The euro dipped 0.1% to $1.2106, retreating from a session high of $1.2138 hit shortly after the Chinese figures. It touched a two-year low of $1.2067 on Monday when Spanish bond yields hit euro-era highs.

Traders said there was support at an options barrier at $1.2050 and below that at the psychological level of $1.2000. Below that the next target would be the 2010 low at $1.1876.

The German PMI showed manufacturing and services activity shrinking in July.

Reuters