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Euro slumps to 23 month low on USD
Friday, 1st June 2012 12.05pm

The euro sank to a 23-month low against the dollar today and hit its weakest in more than a decade versus the yen as investors ditched the single currency due to escalating concerns about Spain's banking sector.

Japan stepped up warnings that it could intervene to curb the safe-haven yen's recent climb, saying the rise was being driven by speculators and that it would act decisively if excessive market moves continued.

The euro fell to a low of $1.2312 on trading platform EBS, its weakest since July 2010. It last fetched $1.2321, down 0.3 percent on the day, with a drop towards $1.20 likely as "bears" - betting on more weakness - remained firmly in control.

The drop in the common currency came as Spaniards sent money abroad in droves, worried about the health of the country's banks. Bank of Spain data showed a net 66.2 billion euros ($82.0 billion) was sent abroad in March, the most since records began in 1990.

"It is looking very bearish for the euro with the latest capital flows data showing a significant amount leaving Spanish banks, all of which indicate they will probably need official help," said Peter Kinsella, currency strategist at Commerzbank.

Any help from the European rescue fund for Spain would mean an additional tax burden on Germany, Europe's paymaster, and could hurt the safe-haven status of German bunds, he added.

"It is not a situation where there is much help for the euro and chances are it is headed towards $1.20."

With German two-year bond yields falling below zero for the first time, traders said a lot of safe-haven flows have, so far, stayed within the single currency area. But if that were to change, the euro's decline against the dollar and the yen could accelerate considerably. The euro's selloff has gained steam this week as Spain's borrowing costs surged on worries it may need to issue more debt to recapitalise its banks, adding stress to markets already frayed by anxiety that Greece may exit the euro zone. Rising costs of funding for the government risk pushing Spain towards an international bailout. The euro has fallen almost in lock step with the yield spread between Spanish 10-year government bonds and German Bunds which hit its widest levels in the euro-era this week. (C ) Reuters

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