FOREX-Euro suffers setback as economy shrinks; NZD jumps

Thu Feb 14, 2013 6:23pm EST

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By Ian Chua

SYDNEY, Feb 15 (Reuters) - The euro nursed heavy losses on Friday in the wake of data showing the euro zone slipped deeper into recession late last year, while markets braced for more conflicting comments on currencies as G20 officials meet in Moscow.

Traders said the disappointing data could add pressure on the European Central Bank to ease further and gave investors an excuse to take profits in a currency that had gained as much as 4 percent on the dollar this year.

In contrast, a surprisingly strong New Zealand retail sales report saw investors snap up the kiwi dollar, driving it half a U.S. cent higher to a 17-month peak of $0.8519.

The euro plumbed a one-month low on the kiwi at NZ$1.5647 . Against the greenback, it was at $1.3355, having hit a three-week low of $1.3315. The euro was now well off a 13-month high of $1.3711 set early this month.

Immediate support for euro/dollar is seen around $1.3310, a level representing the 38.2 percent retracement of its Nov-Feb rally.

Against the yen, the euro slid to 124.25, down from a 34-month high of 127.71 set a week earlier.

Economic output in the 17-country region fell 0.6 percent in the fourth quarter, the steepest since the first quarter of 2009 and more severe than the median forecast of a 0.4 percent drop in a Reuters poll.

"As the fundamental outlook for the region deteriorates, the European Commission appears to be scaling back its push for austerity...," said David Song, currency analyst at DailyFX.

"In turn, the European Central Bank may have little choice but to carry out its easing cycle throughout 2013, and the Governing Council remains poised to push the benchmark interest rate to a fresh record-low as the economic downturn threatens price stability."

Traders said a comment from European Central Bank Vice President Vitor Constancio about negative deposit rates in the euro zone being a possibility, also weighed on the single currency.

The pullback in the euro saw the dollar index briefly hit a one-month high of 80.621, bringing into focus this year's peak of 80.868 set on Jan. 4.

The greenback, however, lost a bit of ground against the yen. It was last at 92.84, a day after the Bank of Japan kept monetary policy steady and revised up its assessment of the economy. Still, it was near a 33-month high around 94.47 set on Monday.

Investors remained wary on the yen with the BOJ under intense political pressure to reflate the economy.

BOJ Governor Masaaki Shirakawa on Thursday defended the central bank's aggressive monetary expansion, saying it was aimed at reviving the economy not at weakening the yen.

His comments came as finance officials from the G20 gather in Moscow and are sure to generate mixed messages about how to address policies of Japan's new government which have driven the yen down.

"The prevailing sense from all of the official commentary on currencies this week is that the international community is willing to tolerate a weaker yen so long as Japan continues to focus on domestic policies and probably moderates its rhetoric on the currency," says JPMorgan in a note.

Another standout currency was sterling. It wallowed at 6-1/2 month lows on the greenback near $1.5475 as investors continued to shun the currency after the Bank of England this week forecast higher inflation and weak growth.

The Norwegian crown was a big mover, falling sharply after the head of the country's central bank said he was in no hurry to raise rates and might even cut them if the currency got too strong.

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