FOREX-Euro falls as Cyprus plan sparks contagion fears

Mon Mar 18, 2013 2:47pm EDT

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* Investors jittery after proposal to tax Cypriot deposits
    * Spanish, Italian bond yields rise
    * Euro/dollar technical indicators show sell signal

    By Wanfeng Zhou
    NEW YORK, March 18 (Reuters) - The euro tumbled to a more
than three-month low against the U.S. dollar on Monday after a
Cypriot plan to tax bank deposits as part of an EU bailout deal
sparked fears the euro zone's larger troubled economies such as
Spain and Italy may follow suit.
    The weekend move broke with previous practice that viewed
depositors' savings as sacrosanct and raised fears that a
scramble to withdraw cash could spread to larger states seen as
possible bailout candidates. Both Spanish and Italian bond
yields rose. 
    But some analysts said losses in the euro should be
contained. Cyprus is a very small euro zone economy and many
believed the move is a one-off measure that's unlikely to be
repeated in other peripheral euro zone countries.
    "Cyprus has long functioned as an offshore financial centre,
particularly for Russians," said Karl Schamotta, senior
strategist at Western Union Business Solutions in Calgary. "Few
in Italy or Spain expect the same to happen at home, given that
their countries do not function as offshore tax havens. A wider
bank run will probably require a bigger trigger.
    "Traders are nervous about taking larger short positions,
and many are already looking for attractive market entry
opportunities."
    The euro fell as low as $1.2880 in Asian trade, the
weakest since Dec. 10, before paring losses to last trade down
0.9 percent on the day at $1.2951.
    Reflecting that nervousness, 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.
    Cypriot ministers scrambled to revise the plan before a
parliamentary vote on Tuesday, hoping to soften the blow to
smaller savers by tilting more of the tax towards those with
deposits greater than 100,000 euros ($130,000).
    Scotiabank chief currency strategist Camilla Sutton said all
the technical signals are in 'sell' territory in the euro/dollar
pair and the relative strength indicator is not yet in oversold
territory. 
    Against the yen, the euro fell 0.8 percent to
123.55 yen, 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.
    The euro fell 0.2 percent against the Swiss franc to 1.2250
francs and 0.7 percent against the British pound to
85.85 pence.
    The dollar dropped to as low as 93.45 yen on
trading platform EBS, where yen flows are the largest, as
investors sold riskier, higher-yielding assets funded by the
cheaper Japanese currency. On the Reuters platform, the
dollar/yen low was 94.03. 
    It later recovered all losses to trade at 95.37 yen, up 0.1
percent on the day, more than one yen lower from a 3-1/2-year
peak of 96.71 yen struck on March 12.
    Analysts said the yen should remain under pressure on bets
of more aggressive easing steps from the Bank of Japan, and
expectations euro zone politicians will be able to reassure
markets.
    The dollar index, which measures the greenback versus a
basket of currencies, rose 0.5 percent to 82.662. An
improving economy in the United States has underpinned the
dollar in recent weeks.
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