* Euro cuts gains as Spanish borrowing costs rise
* Italy sells three-year debt at 6-mth high of 5.3 pct
* Investors wary ahead of Greek election on Sunday
By Anirban Nag
LONDON, June 14 The euro pared gains against the
dollar on Thursday as Spanish and Italian bond yields surged,
highlighting the risk of euro zone contagion ahead of Sunday's
elections in Greece that could lead to the country being pushed
out of the common currency.
The euro's outlook may stay bearish after benchmark 10-year
Spanish government bond yields hitting 7 percent on Thursday - a
level where fellow euro zone members such as Greece and Ireland
had to seek international bailouts as it is seen as too
expensive in the long term.
The aid deal put together for Spanish banks at the weekend
has signally failed to calm the markets, with Italian three-year
borrowing costs spiking to 5.30 percent at an auction on
The common currency fell to a session low $1.2542 on
trading platform EBS, turning lower on the day and off the day's
high of $1.25894. It was last trading at $1.2565 with large
option expiries cited at $1.2500 which could curtail losses for
the time being.
"Spanish yields are creeping up, which clearly indicates
that the bank bailout deal will not change anything and they are
dragging Italian yields higher," said Stuart Frost, head of
Absolute Returns and Currency at fund manager RWC Partners.
"For the euro/dollar, all this means it is on a slippery
Earlier, the common currency took Moody's downgrade of
Spanish government debt to one notch above junk status in its
Many analysts said the euro was likely to trade between
$1.24 and $1.27 ahead of Sunday's Greek vote, with investors
either reluctant to initiate fresh bearish bets or squaring
positions given uncertainty over the election outcome.
Speculators have added to very large bearish bets against
the euro in the past few weeks, leaving scope to the euro to
stage a short-covering rally if parties supporting austerity and
reforms in Greece win at the weekend.
Right now, it is too close to call and a victory for the
far-left SYRIZA, which opposes the austerity measures on which
Greece's bailout deals are based, would intensify fears of a
potential euro zone break-up, and likely push the currency
towards recent two-year lows around $1.2280.
A sharp rise in yields on German Bunds, viewed as the euro
zone's safest asset, has also raised concerns that the cost of
the debt crisis is growing for Germany, the bloc's paymaster. A
further rise in German yields would weigh further on the euro,
SNB REITERATES FRANC CAP
The Swiss franc rose against the euro after the SNB said it
was prepared to buy unlimited amounts to defend the 1.20 level.
The euro fell to 1.2008 francs on trading platform
EBS, from around 1.20196 before the announcement.
Traders said the SNB has been buying lots of euros in recent
weeks, stepping up its defence of the cap ahead of the Greek
election, which could fuel demand for the safe-haven franc. SNB
President Thomas Jordan hinted that capital controls could be
introduced if the situation in the euro zone deteriorates and
puts more upward pressure on the franc.
"Clearly the SNB is trying to downplay the franc's
attractiveness and buy more time. We expect further pressure on
the euro/Swiss franc 'floor' in the coming days, especially
considering the Greek elections," said Peter Rosenstreich, chief
FX analyst at Swissquote Bank, in a note.
Against the yen, the euro eased 0.1 percent to 99.60
, off a session high of 100 yen, with Japanese
exporters' bids lined up above that level. The dollar fetched
79.26 yen, off Monday's high of 79.92 yen with
expectations of more easing by the Federal Reserve weighing on
The New Zealand dollar was up 0.5 percent on the day
at US$0.7778, paring gains from Wednesday, when it hit a
one-month high of $0.7808.
The kiwi eased after the Reserve Bank of New Zealand said a
weak economy and an uncertain global outlook meant rates need to
stay at record lows. As expected, the RBNZ kept rates unchanged
at 2.5 percent for a 10th straight meeting.