FOREX-Euro dips on Italian politics, may slip further

Mon Dec 10, 2012 4:56am EST

Related Topics

* Euro slides after Monti's offer to quit raises uncertainty
    * German trade data, ECB rate cut prospects hurt euro
    * Fed meeting on Wednesday significant for dollar

    By Anooja Debnath
    LONDON, Dec 10 (Reuters) - The euro dipped against the
dollar on Monday as political turmoil in Italy and weak German
data stoked concerns about the region's deteriorating near-term
outlook.
    More weakness was seen likely as euro zone peripheral bond
yields widened over their German counterparts after Italian
Prime Minister Mario Monti said over the weekend he would resign
once the 2013 budget was passed.
    An election in February looks likely, raising questions over
who will navigate the euro zone's third-biggest economy out of
the debt crisis 
    The euro was down 0.1 percent on the day at $1.2905,
not far from a two-week low of $1.2876 set last Friday. Traders
cited stop-loss orders above $1.2920 and near-term support at
$1.2842, its 233-day moving average.   
    The euro posted its biggest weekly losses against the dollar
in a month last week, as speculators bet against the single
currency on expectations that the European Central Bank will cut
interest rates early next year. 
    "I am actually surprised the euro is not lower than where it
currently is. It is not a complete shock as Monti had lost
support from (former Prime Minister Silvio) Berlusconi's party
but the timing is surprising," said Audrey Childe-Freeman, head
of foreign exchange strategy at BMO Capital Markets. 
    "It is disappointing as Monti had gained significant
credibility in the markets over the last 12 months and now the
whole thing is been questioned." 
    Italy has nearly completed its planned bond market funding
for this year but will need to borrow around 420 billion euros
in 2013. Italian borrowing and default insurance costs rose on
Monday, also pushing Spanish 10-year yields higher. 
    Along with peripheral euro zone worries, concerns about core
countries also weighed on the euro. Data on Monday showed
Germany's trade surplus was its narrowest in over half a year in
October after falling demand from its recession-hit European
trade partners hurt its exports. 
    The 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. 
    
    FED FOCUS
    The dollar drew support from strong U.S. jobs data last
Friday, which showed firms had increased hiring, though caution
about fresh monetary easing steps from the Federal Reserve later
this week limited its advance. 
   "People are just positioning themselves for the last decent
week we could have in terms of data before getting into the
Christmas period," said David Bloom, global head of FX research
at HSBC. "The Fed meeting will be important." 
    Many economists expect the Fed will announce on Wednesday
monthly bond purchases of $45 billion, signalling it will keep
pumping money into the economy during 2013 in a bid to bring
down unemployment. 
    Signs Washington policymakers are no closer to averting tax
hikes and spending cuts set to take hold next year, which
analysts say could push the U.S. economy back into recession,
also weighed on the dollar.
    President Barack Obama met Republican leader John Boehner on
Sunday to discuss ways to avoid the "fiscal cliff" but a
resolution remained elusive. 
    The dollar fell 0.2 percent on the day to 82.25 yen.
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.
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