FOREX-Euro sinks to one-month low vs dollar as Italy weighs

Wed Nov 9, 2011 12:18pm EST

Related Topics

* LCH action on Italian debt pressures euro
    * Markets fear ECB will be forced to do more
    * One-month implied vols on euro/dollar vols rises

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Nov 9 (Reuters) - The euro plummeted to a
one-month low against the dollar on Wednesday and could well
fall further on fears Italy, the euro zone's third-largest
economy, may seek a bailout to avoid a debt default.
    Italian borrowing costs topped seven percent as investors
dumped the country's bonds after clearing house LCH.Clearnet SA
raised the margin call on the country's debt. LCH had earlier
taken similar action on Portugal and Ireland and both countries
were forced to seek bailouts as a result.
    Investors are concerned the euro zone and international
lenders may struggle to assemble a bailout large enough for an
economy the size of Italy.
    The euro consequently fell to $1.35522, its lowest since
Oct. 10 on trading platform EBS, and was last down 1.7 percent
at $1.36011 .
    Political turmoil in Italy has thrust it to the epicenter
of the worsening euro zone debt crisis this week as markets
fret about its ability to adopt reforms to cut its debt burden
and make its economy more competitive.
    "The euro has sort of defied gravity for the last couple of
days and it's clearly looking like it has been having a wily
coyote moment, sort of running off the end of the cliff without
realizing that there's nothing underneath," said Ray Attrill,
head of FX strategy for North America at BNP Paribas in New
York.
    "This is exactly what happened today and was exacerbated by
the LCH news, which obviously caused another downleg to the
Italian bond sell-off."
     Even with Prime Minister Silvio Berlusconi promising to
step down, bond yields continued to rise.
    Higher yields will increase pressure on the European
Central Bank to do more. Traders said the bank bought Italian
debt aggressively on Wednesday, and Brown Brothers Harriman
currency strategist Mark McCormick said it may be forced to
increase those purchases or cut interest rates again next
month, all of which should weigh on the euro.
    The ECB cut rates to 1.25 percent last week.
    "All of this is adding to the case for more economic
weakness in the euro zone as a whole, and recent manufacturing
data suggests things are getting worse," McCormick said.
    The euro also fell 1.7 percent at 105.710 yen .
    The euro "looks incredibly vulnerable at the moment," said
Chris Turner, head of foreign exchange strategy at ING.
"Everyone has concluded that the only buyer of Italian debt is
the ECB ... You need a much larger risk premium in the euro and
it's not clear where this is going to end."
    "We think the euro will drift lower to $1.35 in the near
term," said Stuart Frost, head of absolute returns and currency
at RWC Partners.
    Brown Brothers Harriman's McCormick said he expects the
euro to end the year at $1.29.
    One-month implied volatility in euro/dollar, which gauges
market expectations of the pair's currency moves in either
direction jumped to 15.65 percent on Wednesday, from
14.45 percent the previous session.
    Traders said Japanese investors have in the past been big
buyers of Italian debt and the decision to raise margins could
see many unwind those positions, adding to the euro's woes.
    The dollar was slightly higher against the yen 77.740 yen but was up 1.4 percent at 0.90674 Swiss francs .(Additional reporting by Steven C. Johnson; Editing by Andrew
Hay) ((gertrude.chavez@thomsonreuters.com; +1 646 223 6322;
Reuters Messaging: gertrude.chavez.reuters.com@reuters.net))
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