FOREX-Euro slides as Italy, Spain bond yields jump
* Euro extends losses, hits lifetime low vs Swiss franc
* EUR/USD hits 4-mth low, safe-haven dollar climbs broadly
* Jump in Italy, Spain yields prompts exodus from risky FX
By Naomi Tajitsu
LONDON, July 12 (Reuters) - The euro stumbled to an all-time low against the Swiss franc on Tuesday as euro zone government bond yields vaulted higher due to deepening concerns about the region's debt crisis, prompting investors to dump the single currency for safer ones.
The euro sank 1 percent on the day to 1.1550 Swiss francs on electronic platform EBS. Against the dollar, it hit a four-month trough of $1.3837.
Heavy demand to dump the euro boosted the dollar, franc and yen, often considered safe havens, while high-yielding currencies including the Australian and New Zealand dollars took a hit.
Confidence is dwindling in the European Union's ability to prevent debt problems in Greece, Ireland and Portugal from spreading to Spain and Italy, where bond yields have surged in recent sessions.
"Italy has moved very, very quickly to catch up with Spanish yields, and the market has woken up to the fact that there's a much larger problem. That's what precipitated the large fall (in the euro)," said Adam Myers, senior FX strategist at Credit Agricole CIB.
He added that concerns about whether Italy can undertake budget reforms had changed the market's previous perception that Rome was immune to the debt crisis.
Many in the market said the sell-off in the euro seen this week marks a turning point in the currency market, where investors have acknowledged that stronger countries were not immune to the region's fiscal problems.
"I very much doubt the ECB, let alone the IMF, can bail out a country the size of Italy," Myers said.
Analysts said the euro would continue to take a beating as yields rise in the wake of an emergency meeting by European financial officials on Monday, which failed to agree fresh action to tackle the region's debt problems.
The euro was hammered lower after a jump in benchmark 10-year Spanish and Italian bond yields expanded their spreads against safe-haven German debt to their widest since the mid-1990s.
By 0917 GMT, the euro traded at $1.3920.
Traders cited Asian sovereign demand had pulled the euro away from its trough, along with results from an Italian bond auction which showed Rome was able to sell one-year paper, albeit at much higher yields than usual.
The euro clawed back above $1.3906, the 200-day moving average which was seen as a key support level. Having broken below that level in earlier trade, a daily close below would signal further losses.
The sell-off in risky currencies boosted the dollar roughly 1 percent higher versus a currency basket to 76.719, its highest in four months.
The Swiss franc and the yen also rallied, with the Swiss unit hovering around historic highs against sterling, while broad yen strength pushed the dollar down roughly 1 percent on the day to 79.17 yen , its weakest since mid-March.
The Australian dollar fell 1 percent versus its U.S. counterpart, while the New Zealand currency fell 2 percent. Closely linked to commodity prices and seen as a barometer of risk demand, these currencies reversed gains made in previous sessions.
The euro has already plummeted more than 4 percent against the dollar this month, and market participants in London said there was "very much" a sense of panic on the trading floor.
"Now should be the time to buy euros, but it's just too scary," another trader said.
Some analysts said the euro could weaken further as the latest IMM positioning data shows speculators added to their net long positions in the euro, or bets on euro strength, through last week.
The drop in those positions has contributed to a spike higher in market volatility, pushing one-month euro/dollar implied vol to around 15 percent its highest since November 2010.
The premium on euro puts -- the option to sell the currency -- also jumped, with one-month 25-delta risk reversals hitting 3.3 percent in favour of puts, its highest in roughly a year.
Analysts said a further sell-off in the euro would ramp up implied vol, but some argued it could hit a ceiling soon if a strengthening view of further euro weakness leads to a growing unwillingness to sell volatility in the currency.
"Acceleration towards $1.35 could ... push one-month vol still higher," analysts at Societe Generale said in a note.
"However, we believe that the market could not currently absorb much more than 1-2 vols higher on the one-month vol, so a level at 20 looks out of reach." (Reporting by Naomi Tajitsu)
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