LONDON (Reuters) - The euro dipped and investors sought safety in German government bonds on Friday as a two-notch downgrade of Spain’s credit rating ahead of a key Italian bond auction increased nervousness about the struggling economies in the euro zone.
European shares stabilized at 1,040.70 points after three straight days of gains following the move by Standard & Poor’s - it cut Spain to BBB plus - and fresh data showing Spain’s jobless rate rising.
The rating downgrade took the gloss off markets supported this week by the U.S. Federal Reserve’s commitment to support growth, and shifted the focus back to the euro zone.
“This downgrade shows that governments in Europe are still struggling to get their budgets in balance. We are probably going to see more downgrades from other rating agencies,” Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels, said.
The front month German bond futures contract hit a record high before trimming gains to 141.10, up 18 basis points on the day. Ten-year German bond yields fell two basis points to about 1.66 percent.
The riskier sovereign debt of Spain and Italy moved in the opposite direction, with 10-year Italian bond yields up 9 basis points to 5.73 percent.
Spain’s equivalent debt rose 11 basis points to 5.96 percent, after briefly piercing the psychologically key 6.0 percent threshold.
Italy’s borrowing costs are also expected to rise further towards 6.0 percent when the government auctions up to 6.25 billion euros in fixed-rate paper later in the day.
The euro was down 0.1 percent below $1.3190, though it reversed some of its earlier losses. It had climbed to a three-week peak near $1.3264 on Thursday on expectations of continued low interest rates following the Federal Reserve’s policy meeting this week.
The dollar measured against a basket of key currencies inched up 0.24 percent.
The Bank of Japan’s widely expected decision to increase bond buying by 10 trillion yen ($124 billion) caused only temporary losses in the yen, which quickly strengthened around 0.4 percent against the dollar.
The Spanish downgrade kept oil subdued below $120 a barrel, and the MSCI world stock index dipped 0.2 percent after hitting three-week highs in Thursday’s session. ($1 = 80.7900 Japanese yen)
Writing by Carolyn Cohn and Richard Hubbard; Additional reporting by Atul Prakash; editing by Janet McBride