Euro set for sixth week of losses as European yields rise

By Saikat Chatterjee

LONDON (Reuters) - The euro weakened on Friday and is set for a sixth consecutive week of losses as rising bond yields in Italy triggered nervousness among investors, while brewing political instability in Spain also weighed on sentiment.

The Swedish crown was the surprise winner among G10 FX currencies in European trade after the country's debt office said it plans to build up a position of up to 7 billion crowns ($803 million) as it reduces its buying of costly foreign currencies.

"Italy is still the focus for financial markets for now with Spanish news playing into the overall theme, though we are a long way from those concerns hitting the macro fundamentals," said Lee Hardman, an FX strategist at MUFG in London.

Spain's opposition socialist leader Pedro Sanchez said his party would force a snap election if it wins a no confidence vote against Prime Minister Mariano over a graft case involving members of his conservative People's Party.

Italian prime minister-designate Giuseppe Conte met the governor of the Bank of Italy on Friday as markets fell on fears the incoming eurosceptic government will embark on a spending spree that will undermine fragile state finances.

The closely-watched Italy-Germany 10-year bond yield spread, seen by many investors as a proxy for investors' sentiment on the euro zone, widened to 200 basis points (bps) for the first time since June. (IT10YT=RR), (DE10YT=RR).

Widening spreads have pulled the euro lower against the Swiss franc in recent days, with the franc set to post its fourth consecutive weekly gain against the single currency. On Friday, the euro was down 0.1 percent at 1.1601 francs. (EURCHF=)

Broader currencies remained in a range with investors digesting news this week including minutes from the Federal Reserve's latest policy meeting which were perceived to be dovish, and mixed European data with the dollar index (DXY) holding below a December 2017 high of 94.19 hit this week.

"The euro continues to be under pressure especially against the franc as Italian/German spreads are widening but markets are taking a 'wait and see' approach for now," said Alvin Tan, an FX strategist at Societe Generale (PA:SOGN) in London.

The single currency (EUR=EBS) was down a fifth of a percent against the dollar at around $1.17. For the week it is down 0.6 percent and on track for six consecutive weeks of losses.

Data this week showed the German PMI fell to a 20-month low in May indicating that momentum in Europe's biggest economy was faltering. Minutes of the European Central Bank's April meeting showed policymakers were worried about a more pronounced slowdown in the euro zone and political uncertainty in Italy. and

SWEDISH SURPRISE

The crown has been one of the currencies most heavily sold in recent months by speculators betting that monetary authorities in Sweden would significantly lag behind their peers in Europe in removing policy support.

The currency therefore jumped on the news from the Swedish National Debt Office (SNDO).

"The fact that the SNDO is taking a position for a stronger SEK vs EUR is a very good sign for crown bulls," Richard Falkhenhall, a Stockholm-based senior FX strategist at SEB said on Twitter.

The crown rallied 1 percent to 10.16 per euro (EURSEK=D3) and by a similar margin against the dollar at 8.6750.

The yen and the safe-haven Swiss franc are set to notch up big weekly gains in response to heightened worries over global politics. However, traders were quick to lock in gains before long weekends in the United States and Britain.

The dollar had been rising for weeks on its widening yield advantage but lost some of its momentum after the Fed minutes on Wednesday were seen as more dovish than markets had expected.