FOREX-Euro loses steam as political uncertainties re-surface

Tue Feb 5, 2013 1:25am EST

Related Topics

* Euro retreats from 14-month high as traders take profit

* Corruption scandal in Spain, Italy election worries hurt euro

* Markets cautious ahead of ECB meeting Thursday as well

* Euro down 0.2% vs dollar, dollar/yen flat

* Aussie down 0.3% after dovish RBA comments

By Hideyuki Sano and Ian Chua

TOKYO/SYDNEY, Feb 5 (Reuters) - The euro extended losses on Tuesday as political uncertainty in Italy and Spain prompted traders to take profits on the currency's stellar gains so far this year, after it hit a 14-month high last week.

That also helped to ease selling pressure on the yen slightly, lifting it above a 33-month low against the dollar, though entrenched expectations of more monetary easing in Japan kept the Japanese currency in check.

The euro dipped 0.2 percent in Asia on top of Monday's 0.95 percent fall to trade at $1.3485, well off a 14-month high of $1.3711 set Friday.

Immediate support is seen around $1.3484, the peak for 2012, followed by $1.3255, an area that provided a floor recently.

A selloff in Italian and Spanish government bonds and stocks on Monday amid growing political uncertainty in the two countries poured cold water on optimism that Europe is slowly healing from its debt crisis.

Spanish Prime Minister Mariano Rajoy faced calls to resign over a corruption scandal, while in Italy the growing popularity of former premier Silvio Berlusconi was a worry for investors in the run-up to elections this month.

"Some euro zone countries, such as Spain, are still perceived to be fragile and this shows that their vulnerability could come to surface from time to time," said Katsunori Kitakura, associate general manager of market making at Sumitomo Mitsui Trust Bank.

Still, not many market players think potential political upheaval could derail the euro zone's efforts to fix its debt problems.

"The euro had been rising on the thinking that the worst was over for Europe. There's a bit of adjustment yesterday after aggressive buying but I doubt people will go so far as to go short in the euro again," said a trader at a European bank.

Traders said euro bulls were already starting to turn cautious in the lead-up to Thursday's European Central Bank (ECB) policy meeting as well.

"The recent drawdown in the ECB's balance sheet as well as the recent rapid appreciation by the euro, has stoked not only liquidity concerns, but also concerns that euro zone exporters' competitiveness may be eroding at a very fragile time," said Christopher Vecchio, currency analyst at DailyFX.

Vecchio was referring to a recent repayment of a whopping 137 billion euros of ECB emergency loans, which slashed the amount of cash floating in the euro zone banking system.

"Accordingly, a more neutral tone is expected this week, if only to offset the prior hawkish tone set forth by the ECB at the January meeting."

Against the yen, the euro dipped below a key support at 124.62 -- the 23.6 percent retracement of its rally since late January to a 34-month high of 126.97 hit last Friday.

But euro buying from Japanese investors helped to limit losses. The euro last stood at 124.54 yen, down slightly from late U.S. levels.

The dollar also held flat at around 92.40 yen, afterhaving peaked at a 33-month high of 93.185 yen on Monday.

Some traders suspect the currency pair is repeating its trading pattern in recent weeks, where it falls early in the week and recovers to hit new multi-year highs in the latter half of the week.

Many traders also think the yen's downtrend will remain intact with the Bank of Japan under the most pressure among major central banks to ease aggressively.

The Reserve Bank of Australia left its cash rate steady at 3.0 percent on Tuesday as widely expected, having just cut in December.

Still, the Aussie fell 0.3 percent to $1.0404 as the central bank left door wide open for further easing by explicitly mentioning the possibility of more easing.

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