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Euro Falls as Moody’s Cuts Spain Regions, French Sentiment Drops

The euro weakened from a five-month high against the yen after Moody’s Investors Service cut the ratings of five Spanish regions and French industrial confidence fell to the lowest in more than three years.

The 17-nation currency dropped for the third time in four days versus the dollar as Spanish newspaper El Confidencial reported that the government told the European Union it will miss itsbudget deficit target this year. The yen strengthened against all 16 of its major counterparts after earlier weakening past 80 per dollar for the first time in three months.

“We had the downgrade of some of the regions in Spain overnight and this may have been negative for” the euro, said Marcus Hettinger, a currency strategist at Credit Suisse Group AG. “The French business confidence indicator was quite a disappointment. That’s probably also a reason why the euro weakened. It looked like we could get some stabilization.”

The euro declined 0.4 percent to 104.04 yen at 10:21 a.m. London time after rising to 104.59 yen, the strongest level since May 4. The common currency dropped 0.2 percent to $1.3039. The yen strengthened 0.2 percent to 79.811 per dollar after depreciating to 80.01, the weakest level since July 6.

Moody’s cut the rating of Catalonia, which accounts for a fifth of Spain’s economy, by two steps to Ba3, according to a statement yesterday. The company said the decision was “driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves.” A week ago, Moody’s kept Spain’s sovereign rating at Baa3, the lowest investment grade.

Spain Deficit

The Spanish government told the EU its budget deficit in 2012 will be 7.3 percent of gross domestic product, exceeding a target of 6.3 percent, El Confidencial said, citing a Spanish report to the EU.

The euro has strengthened 4 percent in the past three months, the best performance of 10 currencies tracked in Bloomberg Correlation-Weighted Indexes. The shared currency is still down 1.7 percent this year.

“With all the troubles in Europe, it seems to be hard to buy the euro,” said Derek Mumford, a Sydney-based director at Rochford Capital, a currency risk-management company. “The euro is defying gravity. The promise from the European Central Bank to support sovereign debt has had effect, and has been buying some time. The overall picture is getting worse.”

The European Commission in Brussels will say today its initial estimate for euro-area sentiment was minus 25.9 in October, according to the median forecast of economists in a Bloomberg News survey. That would match September’s reading that was the lowest since May 2009.

The Hong Kong Monetary Authority said it sold HK$3.914 billion to prevent the currency from appreciating. The city’s de facto central bank stepped in on Oct. 19 for the first time since 2009 to prevent the Hong Kong dollar from rising against the U.S. currency after it touched the upper limit of a range that triggers an intervention.