[TEST INTERSTITIAL] Euro Falls in Longest Stretch Since June on Record Unemployment

Europe’s 17-nation common currency posted its longest stretch of weekly losses since June as demand slumped after Italy’s election produced a hung parliament and euro-area unemployment climbed to a record.

The Dollar Index (DXY) rose to the highest level since August as investors weighed the U.S. government’s failure to avoid automatic budget cuts. The euro fell below $1.30 for the first time in two months as the region’s inflation rate was below the European Central Bank’s 2 percent ceiling before a policy meeting March 7. The Labor Department may report on March 8 that U.S. employers added 160,000 workers last month, a Bloomberg survey shows.

“It’s a combination of Italy’s election and generally soft economic data out of the euro zone,” Dan Dorrow, the head of research at Faros Trading LLC in Stamford, Connecticut, said of the euro’s decline. “We saw unemployment grinding higher.”

The euro fell 1.3 percent this week to $1.3022 in New York after dropping 3.8 percent in February, snapping a six-month rally. The single currency touched $1.2967, the lowest level since Dec. 11, and weakened 1.1 percent to 121.87 yen. The dollar rose 0.2 percent to 93.59 yen.

Dollar Measure

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against currencies of six U.S. trading partners, gained 1 percent to 82.273, and reached the highest since Aug. 20.

Investors have sought the dollar against the euro as short- term interest rates have swung to the U.S. currency’s favor.

The difference between the rate on a two-year interest-rate swap denominated in euros and that in dollars has narrowed to five basis points from about 27 basis points in January. Swap rates typically mirror the trend of movements for similar- maturity government debt yields.

“Front-end yield spreads between the euro zone and U.S. have moved measurably against the euro for the past month,” Robert Lynch, a New York-based currency strategist at HSBC Holdings Plc, said in a telephone interview. “That’s after having moved measurably in favor of the euro in the prior two months.”

Futures traders are betting the euro will weaken against the dollar, reversing to a net-short position of 9,394 contracts as of Feb. 26, figures from the Washington-based Commodity Futures Trading Commission show. The week before, large speculators held a net-long position of 19,103 contracts.

Wagers that the British pound would fall against the dollar rose to 36,130, the most in a year.

Yen Down

The yen weakened yesterday by the most to the dollar since Feb. 11. Japan’s currency has declined for five straight months, the longest streak since 2008.

The Bank of Japan may add monetary stimulus as early as April as prospective governorHaruhiko Kuroda looks to demonstrate a more aggressive approach to tackling 15 years of falling prices. Kuroda, the Asian Development Bank president, would take office after Governor Masaaki Shirakawa retires March 19, if confirmed by Parliament following his official nomination Feb. 28.

“I would expect that dollar-yen trend to resume,” Faros Trading’s Dorrow said.

Markets were buffeted by the standoff between Democrats and Republicans about how to replace the cuts totaling $1.2 trillion during nine years, known as the sequester, $85 billion of which would occur in the remaining seven months of this fiscal year.

Global Economy

“It’s hard not to say that there’s something going on in the world that means lower growth,” Peter Gorra, chief dealer in New York at BNP Paribas SA, said in a telephone interview.

Unemployment in the U.S. hasn’t been less 7 percent since November 2008. The rate will be unchanged at 7.9 when the Labor Department reports the figure on March 8, according to median forecast of economists surveyed by Bloomberg.

Brazil’s real gained 0.7 percent to the greenback and South Korea’s currency was up 0.5 percent in February, the biggest gainers of the dollar’s 16 most-traded peers, according to data compiled by Bloomberg. The pound lost 4.4 percent and Norway’s krone weakened 4.8 percent.

This year, the real has strengthened 3.6 percent as the pound has lost 7.5 percent.

A gauge of manufacturing in the 17-nation euro area was 47.9 in February, London-based Markit Economics said, below the level of 50 that shows contraction. Unemployment in the region climbed to 11.9 percent in January, the highest since the data series started in 1995, the European Union statistics office said.

“The overall picture is consistent with a euro-zone economy that is still stuck in recession,” saidLee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “There are downside risks for the euro. The ECB could signal it is closer to further monetary easing next week.”

The euro is forecast to be about unchanged at $1.30 by the end of the year, while the yen is estimated to weaken to 95 to the greenback, according to the median estimate of economists surveyed by Bloomberg.