FOREX-Euro falls broadly, stays vulnerable to Italian concerns

Thu Feb 28, 2013 5:05am EST

Related Topics

* Euro falls across the board, manages to stay off weekly lows

* Concerns about Italian political situation weighs on euro

* Focus on U.S. fiscal spending cuts threat on Friday

* Japan nominates Kuroda as next BOJ chief as expected

By Anooja Debnath

LONDON, Feb 28 (Reuters) - The euro fell against the dollar and yen on Thursday on lingering concerns about the political crisis in Italy with investors and speculators seeing little reason to buy the currency.

The euro had pared some of its losses earlier today after the sharp sell-off this week when elections in Italy yielded no clear winner, fuelling concerns it would not be able to push through reforms and reigniting the debt crisis.

Analysts said the euro could show some resilience today and trade above $1.3000 due to month-end demand, but it would be unable to make any notable gains given the continuing political uncertainty.

The common currency was down 0.2 percent on the day at $1.3109, having come near to an eight-week trough of $1.3018 on Tuesday.

Hedge funds were cited as main sellers of the euro. Reported options barriers ahead of $1.3160 and chart resistance at the euro's 55-day moving average at $1.3295, could limit any gains.

"We have got a lot of Italian election uncertainty in the next two to three weeks. There is going to be a lot of political horse trading going into March 15, when the parliament reconvenes, which doesn't sound like it is going to be good for the euro," said Chris Turner, head of FX strategy at ING.

"We have a two-three week period where risk will more be off than on, if we are in the euro/dollar range of 1.31-32 we would prefer to sell at the top of the range really."

Analysts at Morgan Stanley now expect a test of the $1.30 area, with a move below that opening the risk of a decline towards the $1.2660 area, "before a renewed euro recovery develops."

Against the yen, the euro fell 0.3 percent on the day to 120.85 yen, still some way off a five-week low of 118.74 yen set on Monday.

U.S. SPENDING CUTS

Strategists said markets will refrain from making any aggressive bets before the automatic spending cuts of $85 billion, which look increasingly likely to start on Friday with U.S. President Barack Obama and Republican congressional leader nowhere near a deal to avoid them.

"The U.S. fiscal cliff was always one of the scheduled event risks of 2013 and it looks like the aggressive spending cuts are likely to go through," Turner said.

"Right now people are looking at the benign outcome of the cuts, but should there be any disappointing data later, like a decline in consumer or business confidence then market reaction will be magnified given the fiscal cliff backdrop."

Analysts said the dollar has so far however, weathered the threat from sharp U.S. fiscal spending cuts, known as "sequestration", which will likely cut U.S. growth by an estimated 0.5 percent.

The dollar index was last at 81.64 not far from a six-month high of 81.948 reached earlier in the week. On the yen, the dollar was flat at 92.23 yen, still some way off Monday low of 90.85 yen.

The yen showed little reaction after Japan's prime minister nominated, as expected, Asian Development Bank President Haruhiko Kuroda as BOJ governor and Kikuo Iwata, an academic, as one of the two deputy governors.

The parliament is expected to approve the nominations, clearing the way for the central bank to unveil fresh easing steps in April, either at their first policy review on Apr 3-4, or the following one on Apr. 26.

Expectations of more aggressive easing had prompted investors to push the yen down to a 33-month low of 94.77 yen per dollar on Monday, which marked a 16 percent fall since mid-November.

"The market will need a bit of consolidation after such a long period of one-way falls in the yen. But there's no denying that the yen is in a downtrend in a longer term," said Hideki Amikura, head of forex at Nomura Trust Bank.

"I expect the yen to drop more in April, as the market will bet on fresh monetary easing at the BOJ's meeting at the end of April."

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