The euro climbed sharply against the dollar, having earlier breached the $1.30 mark for the first time since mid-February.
The single currency fell to $1.2995 agains the dollar in regular European trading as investors returned their attention to the financial problems facing Spain as the treasury in Madrid prepared to sell a range of debt this week.
But a two-month trough against the dollar, and 18-month low against sterling, signalled a strong reversal, and with the euro up 0.5 per cent to $1.3136 when US equity markets closed.
Spanish 10-year bond yields rose back above 6 per cent, igniting renewed funding concerns and fears that yields could creep above 7 per cent – the level which prompted Greece to seek a bailout. Madrid is to auction a range of short-term notes on Tuesday, and two- and 10-year bonds on Thursday – a sale that will be a test of appetite now the effects of the European Central Bank’s longer-term refinancing operations are fading.
Robert Lynch at HSBC said: “Now that the supportive effects of the ECB’s liquidity injections are subsiding, it has left markets vulnerable to some retracement.
“That very retracement in prices is contributing to the kind of negative feedback loop that is currently weighing on bond markets, and the euro by extension.”
The uptick in risk appetite that helped the euro off its worst levels came after stronger than expected US retail sales data. Against the yen, the euro ended flat at Y105.67, having fallen as much as 0.8 per cent.
Sterling overcame earlier weakness to climb 0.3 per cent to $1.5902 against the dollar and 0.3 per cent to Y127.89 against the yen.
The dollar, however, fell 0.6 per cent to Y80.44 versus a resurgent yen, as the flight to quality favoured the Japanese currency. This haven buying was most prevalent in the Japanese government bond market, sending yields on the 10-year JGB down to 0.93 per cent, a 17-month low.
Hans Redeker at Morgan Stanley said: “With Japanese yields essentially anchored, the recent drop in US yields has prompted the US-Japan rate differential to shrink.”
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