FOREX-Euro pressured by Italy's political crisis

Mon Dec 10, 2012 11:46am EST

Related Topics

* Italy's Monti says he will quit once budget is passed
    * Italian turmoil threatens contagion effect on Spain
    * Fed meeting on Wednesday significant for dollar

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Dec 10 (Reuters) - The euro slipped against the
yen and was flat versus the dollar on Monday after Italy's prime
minister said he would step down early, putting the country's
outlook in a state of flux and raising concerns about the euro
zone's near-term prospects.
    Mario Monti said on Saturday he would resign once the 2013
budget passes. An election in February looks probable, with
investors worried about who will navigate the euro zone's
third-biggest economy out of the debt crisis. 
    The news pushed Italy's borrowing costs higher in midday
trading to 4.83 percent from 4.5 percent in the
previous session. Top-ranking German bonds benefited, lifting
prices and pushing 10-year yields down to 1.28 percent
, from 1.29 percent late on Friday. 
    "The interim political instability in Italy does little to
shore up confidence in the euro," said Joe Manimbo, senior
market analyst at Western Union Business Solutions, in
Washington.
    The euro was down 0.1 percent on the day against
the yen at 106.52 yen, falling for a third straight day. It
dropped as low as 105.94 yen, its weakest in about two weeks.
    Against the dollar, the euro was flat at $1.2927.
Euro resistance remains at the $1.2940 level, traders said, with
support at $1.2885 and $1.2860.
    Some analysts noted that the bond and currency markets'
reaction to Italy's news may have been overdone, given the fact
that Monti would have called for elections in a few months time
anyway. Monti's decision simply expedites the process. 
    "Given the chaotic history of Italian politics, it is almost
certain that whoever is elected prime minister will not be able
to exercise anywhere near the level of control over the
country's fiscal policy enjoyed by Mr. Monti," said Boris
Schlossberg, managing director of FX strategy at BK Asset
Management, in New York. 
    While Italy has nearly completed its planned bond market
funding for this year, the latest political turmoil could hinder
its ability to borrow around 420 billion euros in 2013.
    There could also be an impact on neighboring Spain whose
government is studying the need for outside help.
 
    Concerns about core euro-zone countries also weighed on the
common currency. Germany's Bundesbank last week slashed its
growth outlook for Europe's largest economy to 0.4 percent in
2013 from an early estimate of 1.6 percent. 
   The euro was also pressured by data showing that Germany
posted its narrowest trade surplus in October in more than half
a year, adding to worries that the euro zone's largest economy
may shrink in the fourth quarter. 

    FED FOCUS
    Caution that the Federal Reserve may take fresh steps on 
monetary easing later this week limited the dollar's advance.
    The dollar index was up 0.2 percent at 80.377.
    Many economists expect the Fed to announce on Wednesday
monthly bond purchases of $45 billion, signaling it will keep
pumping money into the economy to bring down unemployment. That
should be bearish for the dollar in general.
    Bob Lynch, global head of FX strategy at HSBC in New York,
said the Fed's likely announcement of further asset purchases on
Wednesday may not overly pressure the dollar as the market has
already factored it in, but over the longer term, the negative
effect would be more pronounced.
    "We view the Fed's asset purchases and the effective
monetization of government debt as debasing to the dollar, 
undermining its reserve currency status in a manner that will
ultimately be reflected in some lowering of its exchange-rate
value," Lynch said.     
    The dollar also was pressured by signs that Washington
policymakers are no closer to averting the so-called fiscal
cliff - tax hikes and spending cuts set to take hold next year,
which analysts say could push the U.S. economy back into
recession.
    The greenback dipped 0.1 percent for the day to 82.41 yen
 as traders said macro funds cut long dollar positions.
    Data showed speculators' net yen short positions last week
rose to their highest since mid-2007. With short bets already
stretched, traders said it would be difficult for the dollar to
advance against the Japanese currency. 
    But some saw a drop in the dollar as a buying opportunity.
    Morgan Stanley recommended buying dollars at 82.00 yen, with
a stop of 81.50 yen and a target of 84.00 yen. The U.S.
investment bank expects a weaker yen on the prospect of further
monetary easing by the Bank of Japan after a general election
next Sunday. 
    Japan's opposition Liberal Democratic Party is expected to
win. This is likely to result in more pressure on the BOJ to
ease policy.
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