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Euro dips, German debt rises after Spain downgrade

Men walk past an electronic board displaying market indices from around the world outside a brokerage in Tokyo April 13, 2012. REUTERS/Toru Hanai

(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.

Men walk past an electronic board displaying market indices

from around the world outside a brokerage in Tokyo April 13, 2012. REUTERS/Toru Hanai

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)

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