FOREX-Euro slumps vs Swissie, Greece concerns intensify

Thu Jun 16, 2011 7:01am EDT

Related Topics

* Euro hits all-time low vs Swiss franc, falls broadly

* Greek debt turmoil deepens, PM tries to salvage government

* Some fund managers trim risk plays, plan to add later

(Adds comment, details, updates throughout)

By Naomi Tajitsu

LONDON, June 16 (Reuters) - The euro hit a lifetime low against the Swiss franc and fell against other major currencies on Thursday as investors rushed into safe-haven assets on concerns that Greece's debt problems were spiralling out of control.

Selling in the euro accelerated, sending it to a three-week low versus the dollar as yields on weaker euro zone bond surged, expanding their spreads against German Bunds to their widest ever.

Violent protests in Athens against government austerity highlighted the political obstacles to a second bailout, with Prime Minister George Papandreou forced to reshuffle his cabinet to salvage his government amid resignations by ruling party lawmakers. [ID:nL3E7HG0P8]

Adding to negative euro sentiment were comments from European Central Bank policymaker Nout Wellink, who was quoted by a Dutch newspaper as saying the European bailout fund should be doubled, raising speculation that the burden faced by euro zone countries to help Greece may increase. [ID:nLDE75F03M]

"There's political turmoil in Greece, and the government doesn't look too stable," said Lutz Karpowitz, currency strategist at Commerzbank in Frankfurt.

"The risk is increasing that Greece may not get a bailout, and this is putting pressure on the euro."

The euro plumbed a lifetime low of 1.1957 Swiss francs EURCHF=R on electronic trading platform EBS.

Seen as a safe-haven currency, the franc brushed off statements by the Swiss National Bank expressing concern about its gains, as the bank gave no sign of action that would stem the currency's upside. [ID:nZCHFHE79L]

The euro EUR= fell 0.6 percent to a session low of $1.4073, its lowest since late May.

It broke below support around $1.4150, its 100-day moving average. A close below that level would offer a technical indication that the euro was vulnerable to more losses, and analysts said the single currency was poised for a move down to May's trough of $1.3970.

A ramp-up in uncertainty about the Greek debt situation drove euro/dollar implied volatilities higher, with one-month vol jumping to around 14.0 percent EUR1MO=, its highest since November and indicating that movements in the single currency may become more erratic.

The premium paid to protect against euro selling has also surged, with the one-month euro/dollar 25-delta risk reversal cranking up 1.0 vol to trade around 3.1 in favour of euro puts, its highest since late May 2010. This indicates a growing euro downside position in the options market.

BANKING STRAINS?

The euro's fall supported the dollar against a basket of currencies, pushing the dollar index .DXY up 0.3 percent to 75.832.

The yen also rose across the board due to its perceived safe-haven status, pushing the dollar down 0.4 percent to 80.70 yen JPY=. The euro, sterling and the Australian and New Zealand currencies each fell as much as 1 percent on the day versus the Japanese currency.

Investors are increasingly unsure whether an agreement on a Greek bailout plan will be reached in the near term as the government's finances dry up. EU and banking sources told Reuters Germany wants the deadline for a second rescue package to be pushed back to September, highlighting the hurdles towards reaching a consensus. [ID:nLDE75F0WQ]

Concerns about possible strains in the banking sector due to Greece's debt problems are raising speculation that European banks could face difficulty in dollar funding, with tension already palpable in the currency swap market.

The one-year euro/dollar currency basis swap spread, the cost of swapping euro into dollar for a year, widened to around 37 basis points EURCBS1Y= according to Reuters data, the widest since February, from around 23 basis points on Wednesday.

Though it was still smaller than a peak of around 55 basis points after the first Greek debt crisis last year, and 120 basis points after the collapse of Lehman Brothers in 2008, traders said market players are increasingly on edge about potential fallout from the debt crisis, which seemed close to a solution, even if a temporary one, just a few weeks ago.

Some fund managers said they had recently pared their risky positions as the Greek debt situation deteriorates while economic data suggests the global economy is struggling to recover.

"We've been taking risk off across the board," said Thanos Papasavvas, head of FX management at Investec, adding that he had been "lightly" selling euros and sterling, while sitting tight on his emerging currency positions.

He acknowledged the latest escalation in investor jitters about Greece may push the euro below $1.40 in the near term, but said he was optimistic Greece would form a stable government and implement the austerity measures required for it to receive more financing aid.

European officials would eventually agree a deal for Athens to avert a formal default, he said.

Because of this, he said he was interested in increasing his risk holdings later in the year, particularly when signs emerge that the global economic recovery is picking up steam.

(Reporting by Naomi Tajitsu; Editing by John Stonestreet)

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