FOREX-Euro drops to 3-month low vs dollar as Cyprus undermines

Mon Mar 18, 2013 12:16pm EDT

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* Investors jittery after proposal to tax Cypriot deposits
    * Focus on Cyprus parliament vote, peripheral bond yields
    * Euro/dollar technical indicators show sell signal

    By Gertrude Chavez-Dreyfuss
    NEW YORK, March 18 (Reuters) - The euro tumbled to a more
than three-month low against the U.S. dollar and a roughly
two-week trough versus the yen on Monday as a bailout plan for
Cyprus that will tax bank deposits spurred  contagion worries in
the euro zone.
    Euro zone finance ministers demanded at the weekend that
Cypriots pay up to 9.9 percent of their bank deposits in
exchange for a 10-billion-euro ($13 billion) bailout.
 
    The move broke with previous EU protocol that citizens'
savings are sacrosanct and led to worried Cypriots emptying cash
machines on the island.
    "There is a very real possibility of a run on the banks,
people are lined up at the ATMs as we speak; I cannot believe
that they (European officials) didn't see this coming," said
Sean Cotton, vice president and foreign exchange advisor at Bank
of the West in San Ramon, California.
    "The question is, could this happen to other countries? I am
by no means an 'oracle', but right now, I am diligently
searching for any and all companies that produce mason jars and
or mattresses; I have a feeling they are going to make a
killing."
    The speaker of Cyprus's parliament said lawmakers will vote
on the plan Tuesday, postponing the vote by a day, as the
government works on a plan to soften the blow for small savers.
 
    Analysts said any changes to help smaller depositors could
limit euro losses but overall the euro would remain vulnerable.
    The euro dropped to a three-month low of $1.2880 in
Asian trade, before paring losses to last trade down 0.9 percent
on the day at $1.2960. Most investors are likely to use a bounce
to initiate fresh bets against the euro.
    Scotiabank chief currency strategist Camilla Sutton said all
the technical signals are in 'sell' territory in the euro/dollar
pair, with the relative strength indicator not yet in oversold
territory. 
    Against the yen, the euro fell 1.2 percent,
briefly breaking through support at 121.68 yen, its 55-day
moving average. It dropped as low as 121.55, the lowest since
March 6. It was last at 123.14 yen, down 1.1 percent.
    Yields on bonds of struggling euro zone countries such as
Spain and Italy rose while those on safe-haven German bunds
fell, with investors wary of any sign of contagion from Cyprus.
 
    Reflecting that nervousness, in the options market one-month
euro/dollar implied volatilities jumped to 13.33 
percent in New York trading from around 7.7 percent on Friday.
    Euro/dollar one-month risk reversals, which
measure the relative demand for options on the euro rising or
falling, were showing a growing preference for euro weakness.
    The euro fell 0.2 percent against the Swiss franc to 1.2248
francs and 0.8 percent against the British pound to
85.75 pence. Both the franc and the pound are bought
when risks to the euro zone debt crisis escalate. 
    
    YEN FIRM
    The yen was also higher. Many investors consider the highly
liquid Japanese currency a safe haven and so it is sought during
times of economic uncertainty and financial market stress.
    The dollar dropped to as low as 93.45 yen on
trading platform EBS, where yen flows are the largest. On the
Reuters platform, the dollar/yen low was 94.03. 
    The pair has moved away from a 3-1/2-year peak of 96.71 yen
struck on March 12. It was last down 0.3 percent at 94.90 yen.
    However, some strategists said the yen's strength would be
short-lived given bets on more aggressive easing steps from the
Bank of Japan, and expectations euro zone politicians will be
able to reassure markets.
    Given the dollar's solid gains against the euro, the U.S.
currency rose 0.2 percent against a basket of currencies to
82.454.
    An improving economy in the United States has underpinned
the dollar in recent weeks. Data released on Friday showed U.S.
manufacturing was growing, although consumer sentiment in the
world's biggest economy faltered to its weakest in over a year
and inflation picked up.
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