Euro sinks as rally fizzles

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Photo: Filomena Scalise

New York - Stocks fell and the euro sank against the dollar on Monday, while Spanish bond yields rose, as investors worried about details of a $125-billion deal struck over the weekend to shore up Spain's banks.

Wall Street traded lower after closing its best week of the year on Friday, gaining almost four percent, on hopes of the weekend bailout for Spain's banks.

Spanish bond yields rose as investors worried about whether the deal will add to the country's debt burden and how it will affect the current Spanish debt structure.

The deal, struck by euro-zone finance ministers over the weekend, was also seen as a temporary solution that does not address the question of how to kick-start growth in the euro zone's fourth-largest economy.

“This is a realisation that Spain, while providing money for its banks, is going to add to its debt-to-GDP ratio, and it's going to potentially subordinate some of the current Spanish sovereign debt, which doesn't make those bond holders happy,” said Paul Zemsky, head of asset allocation at ING Investment Management in New York.

Highlighting the uncertainty over the deal's terms, European Union and German officials said on Monday that Spain would face supervision by international lenders, contradicting comments from Spanish Prime Minister Mariano Rajoy.

Adding to the gloom, a Greek election on Sunday could put Athens on a path to leaving the currency bloc. Cyprus, deeply exposed to Greece, hinted on Monday that it may become the fifth member of the 17-nation euro area to apply for an international bailout.

The Dow Jones industrial average fell 21.38 points, or 0.17 percent, to 12,532.82. The S&P 500 Index dropped 2.55 points, or 0.19 percent, to 1,323.11. The Nasdaq Composite lost 11.89 points, or 0.42 percent, to 2,846.53.

The Euro STOXX 50, the euro zone's leading index of blue-chip shares, fell 0.3 percent and Spain's IBEX 35 closed 0.5 percent lower.

Global shares as measured by MSCI gained 0.4 percent with overnight help from Asian markets.

As the initial euphoria faded, the euro gave up its gains against the US dollar. It last traded around $1.25 after hitting a near three-week high of 1.2668.

“The deterioration in euro sentiment following Spain's bailout news is a clear indication of the extent of negativity surrounding the currency,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, D.C.

Copper prices rose 1.6 percent, supported by data showing China's May imports of the metal climbed nearly 12 percent from April. The data, however, also showed China's inflation, industrial output and retail sales flagged in May for a second straight month.

Scepticism about the ability of the weekend deal to stop the spread of the debt crisis in Europe was evidenced in renewed appetite for safe-haven US Treasuries.

The benchmark 10-year US Treasury note was up 8/32, with the yield at 1.6046 percent. - Reuters