FOREX-Euro suffers as stocks slide, dollar supported

Fri Aug 19, 2011 4:07am EDT

Related Topics

* Euro falls on lower shares, global economy concerns

* Funding concerns rise, seen positive for dollar

* Europe shares fall 3 percent in early trade

By Naomi Tajitsu

LONDON, Aug 19 (Reuters) - The euro fell broadly on Friday on the back of a sell-off in European shares, after a raft of weak U.S. economic data and concerns about European banks drove investors away from stocks and into U.S. Treasuries.

The Swiss franc rose, benefiting from demand for currencies perceived to offer a safe haven, although its gains were capped by ongoing speculation Swiss authorities will again step in to temper the currency's strength.

The dollar was also supported as demand for the world's most liquid currency is expected to rise given growing signs that financial institutions may be facing funding issues.

"Highly liquid currencies should do well over less liquid ones if liquidity stress increases," said Kasper Kirkegaard, currency strategist at Danske in Copenhagen.

He added: "We could be moving towards the point where the market could start going long on the dollar again ... As long as leading indicators point to a heightened risk of recession, we could see the dollar supported."

Market participants said they expected currency movements to become more volatile due to a lack of long-term buyers in the market.

The euro fell 0.4 percent on the day to a session low of $1.4259, retreating from a session high of $1.4340.

The euro extended losses into a second session, pressured by a 3 percent fall in European shares , which tracked losses in global share markets after a dismal reading of U.S. factory activity on Thursday heightened worries the economy is on the rocks.

The euro's losses were accelerated after stop-loss orders were triggered below $1.4280, but some market participants said the single currency may find support at $1.42.

"Bids are now gathering on a $1.42 handle suggesting it's not going to run away on the downside," CitiFX Wire said in a note.

The euro fell 1 percent on the day against the Swiss franc to 1.1284 francs.

While concern about the global economic picture is expected to keep demand intact for the franc, its upside may be limited by the prospect the Swiss National Bank will act further to stop a big rise in the currency.

The SNB has boosted franc liquidity in the past week or so by increasing sight deposits and selling the franc via swaps on the forward market.

LIQUIDITY ISSUES

Analysts said investors were becoming highly sensitive to signs of funding strains, following news earlier in the week that an unnamed euro zone bank had borrowed $500 million in one-week funds from the European Central Bank.

That has sent interbank lending rates soaring with the USD Libor/OIS spread blowing out to 19 basis points, the highest level in 12 months. Three-month Libor also struck four-month highs at 0.29778 percent.

Other signs of funding problems were highlighted by news the Swiss National Bank had tapped its currency swap line with the Federal Reserve in the past week. This was the first time the Fed has provided liquidity to a foreign central bank since early March.

Broad dollar support pushed the U.S. currency up 0.3 percent to 74.443 versus a currency basket , although it stayed under selling pressure against the yen, which is also considered a "safe-haven" currency.

The dollar slipped 0.4 percent to 76.37 yen, edging closer to an all-time low of 76.25 yen and revving up speculation that Japan may enter the market to stem its currency's strength.

Demand for safe-haven assets drove the 10-year U.S. Treasury yield as low as 1.97 percent on Thursday, the lowest on official records held by the Federal Reserve and the U.S. Treasury. On Friday, the yield was at 2.039 percent. (Additional reporting by Asia Forex Team; Editing by Catherine Evans)

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