EURO Downfall

The euro touched the lowest level in five weeks against the dollar and the yen on speculationEurope’s spreading debt crisis will curb economic growth and pressure the region’s central bank to ease monetary policy.

The 17-nation currency maintained this week’s slide versus the greenback before Spain auctions up to 4 billion euros ($5.4 billion) of bonds today and France sells as much as 8.2 billion euros of debt. European Central Bank President Mario Draghispeaks in Frankfurt tomorrow. The Dollar Index reached the highest since October as economists forecast a U.S. report today will show manufacturing activity increased.

“We are seeing diverging trends with the U.S. economypicking up and the European economy headed for recession,” saidRichard Grace, Sydney-based chief currency strategist and head of international economics at Commonwealth Bank of Australia.“Those diverging economic trends and the likelihood of further ECB rate cuts are going to gradually weigh on the euro.”

The euro fell to $1.3422, the lowest since Oct. 10, before trading at $1.3475 as of 1:07 p.m. in Tokyo from $1.3463 in New York yesterday. The common currency declined to 103.41 yen, matching the lowest level since Oct. 10, before trading little changed from yesterday at 103.78. The yen was at 77.02 per dollar from 77.06.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, reached 78.467, the highest since Oct. 10 before falling 0.2 percent to 78.228.

European Debt Sales

Spain will auction bonds maturing in 2022 and France will sell as much as 7 billion euros of notes and 1.2 billion euros of inflation-linked debt today.

Italian 10-year bond yields fell six basis points to 7 percent yesterday. The ECB purchased larger-than-usual sizes and quantities of the nation’s debt under its Securities Market Program, according to two people with knowledge of the trades. An ECB spokesman in Frankfurt declined to comment.

U.S. banks face a “serious risk” that their creditworthiness will deteriorate if Europe’s debt crisis deepens and spreads beyond the five most-troubled nations, Fitch Ratings said yesterday.

Rising bond yields from the Netherlands to Finland and Austria suggest European officials are struggling to convince investors they can stem the crisis. The euro-area economy is heading toward a “mild recession” by the end of the year, Draghi said on Nov. 3.

Downward Trend

“The euro is in a clear downward trend,” said Marito Ueda, senior managing director in Tokyo at FX Prime Corp., a currency margin company. “Europe’s situation hasn’t changed at all and its crisis has yet to be behind us.” The euro may fall below 100 yen by year-end, he said.

Europe’s shared currency slid 1.6 percent over the past six months versus nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The yen gained 8.9 percent and the dollar rose 4.1 percent, the best performers.

The yen tends to strengthen during periods of financial stress because Japan’s export-reliant economy doesn’t need foreign capital to balance current accounts -- the broadest measure of trade. The dollar benefits due to its status as the world’s reserve currency.

“The bottom line would be to stay defensive,” said Bilal Hafeez, global head of foreign-exchange research in Singapore at Deutsche Bank AG. “The best currency for me is the yen.”

Hafeez expects the yen to appreciate toward 70 per dollar in the next three to six months, strengthening past its postwar record of 75.35 set on Oct. 31.

Japanese Intervention

Japan has sold yen in the foreign-exchange market three times this year as a strong local currency reduces the competitiveness of its exporters.

Japan’s “approach over the last year or so has been to do periodic one-day interventions, often extremely large, and I think they may continue with that,” said Hafeez. That method of market operation “isn’t really the type of intervention that will turn the currency trend around.”

Demand for the dollar increased before a report forecast to show manufacturing in the Philadelphia region expanded in November at the fastest pace in seven months, a sign U.S. factories may provide more support for the recovery.

The Federal Reserve Bank of Philadelphia’s general economic index increased to 9 from 8.7 last month, according to the median estimate of economists surveyed by Bloomberg News. Readings greater than zero indicate expansion in the area covering eastern Pennsylvania, southern New Jersey and Delaware.

The pound touched the lowest level in four weeks against the dollar after the Nationwide Building Society said its index of U.K. consumer confidence fell to a record low in October as Europe’s crisis and the unemployment outlook worsened. Retail sales including fuel slid 0.2 percent in October, following a 0.6 percent gain the previous month, a separate report is projected to show today according to economist estimates.

“The U.K. economy continues to struggle,” said Commonwealth Bank’s Grace. “The pound is probably going to underperform. The Bank of England has made it clear that they’ve got an easing bias.”

The currency was little changed from yesterday at $1.5730 and earlier touched $1.5691, the lowest since Oct. 20.