Worries about high debt levels in Spain hurt the euro on Thursday, driving it to a three-week low versus the dollar and prompting the Swiss National Bank to step in as the franc broke through a ceiling set against the common currency last year. Spanish borrowing costs rose as investors became increasingly nervous following a poor debt auction on Wednesday about the country's ability to meet budget targets that could mark another escalation of the eurozone debt crisis.
Broad euro selling saw the single currency dip below 1.20 Swiss francs for the first time since the SNB set that level as a cap for the Swiss currency in September 2011 in a bid to curb a sharp appreciation caused in part by investors fleeing the euro. The euro hit a low of 1.1990 francs on the EBS trading platform before recovering, with traders saying the SNB was seen buying euros around 1.20. An SNB spokesman said the bank would do all it could to defend the cap.
It recovered to last trade at 1.2015 francs. Traders said the SNB's determination may make investors wary of testing their resolve again, but renewed eurozone debt worries may mean the central bank has to step in again. "Until now the market has been doing the SNB's work for it if there was any dip towards the 1.2000 level, buying any dip as they believed the downside to be limited because they assumed the SNB would aggressively defend it," said Richard Wiltshire, chief FX Broker at ETX Capital.
"If this mood ceases to prevail then market forces may dictate they have to get involved again." Against the dollar, the euro was down 0.5 percent at $1.3076, having hit a three-week low of $1.3057. It also hit its lowest in four weeks against the yen of 106.89 yen on EBS trading platform.
The renewed rise in Spanish government bond yields followed Wednesday's poorly received debt auction, with traders worrying that the positive impact from the European Central Bank's two low-interest, three-year funding extravaganzas may be coming to a screeching halt.
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