FOREX-Euro suffers as Cyprus bailout plan worries investors

Mon Mar 18, 2013 7:49am EDT

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* Investors jittery after proposal to tax Cypriot deposits
    * Euro falls broadly, hits 3-month low vs dollar
    * Focus on Cyprus parliament vote, peripheral bond yields

    By Anirban Nag
    LONDON, March 18 (Reuters) - The euro fell sharply on
Monday, hurt by news of a bailout plan for Cyprus that will tax
bank deposits and which has raised fears of bank runs elsewhere
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 as they rushed to access their funds.
    The speaker of Cyprus's parliament said lawmakers will vote
on the plan on Tuesday, postponing it 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 that overall it would remain vulnerable.
    The single currency dropped to a three-month low of
$1.2882 in Asian trade, before paring losses to last trade down
1 percent on the day at $1.2950. Traders said robust offers to
sell were at $1.2980 with most investors likely to use a bounce
to initiate fresh bets against the euro.
    Against the yen, the euro gapped lower in Asian
trade and fell 2 percent, briefly breaking through support at
121.68 yen, its 55-day moving average. It was last down 1.3
percent at 122.90 yen cutting some losses on buying
by macro funds.
    "If this tax is levied it will set a precedent. It raises
questions over whether other deposits will be safeguarded in
other countries," said Jane Foley, senior currency strategist at
Rabobank. 
    "Euro zone politicians will be at pains today to manage down
the danger of contagion to other (peripheral) markets. The euro
will find a little bit of support from that but markets will
remain jittery."
    Yields on bonds of struggling euro zone countries like Spain
and Italy rose while those on safe-haven German bunds fell, with
investors wary of any fresh signs of contagion from Cyprus.
 
    "This decision is crossing the rubicon and has the potential
to escalate into something which can drag the euro even lower,"
said Howard Jones, advisor at money manager RMG Wealth
Management. "If I was an international investor, I would be
looking to pull money out from European bank deposits and bonds
and seek safety in the Swiss franc."
    Reflecting that nervousness, in the options market one-month
euro/dollar implied volatilities jumped to 9.35
percent in early London trade 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 0.5 percent against the Swiss franc to 1.2210
francs and 1 percent against the British pound to
85.55 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. The highly liquid Japanese currency
is considered a safe haven by many investors and sought during
times of economic uncertainty and financial market stress.
    The dollar dropped to as low as 93.45 yen in volatile
early trade in Asia, its lowest since March 6 and moving away
from a 3-1/2 year peak of 96.71 struck on March 12. It was last
down 0.3 percent at 94.90 yen.
    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 that euro zone politicians will
be able to reassure markets.
    "It's short-term negative for risk, the euro and dollar/yen
but we think it shouldn't last too long ... The broad trend for
yen weakness is still intact despite the near-term upside," said
Bill Diviney, currency strategist at Barclays in Tokyo.
    Given the dollar's solid gains against the euro, the U.S.
currency rose 0.4 percent against a basket of currencies to
82.61.
    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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