FOREX-Euro falls across board for 2nd day as Cyprus weighs

Tue Mar 19, 2013 12:45pm EDT

Related Topics

* Cyprus fears escalate as markets rocked by rumors
    * Investors await vote on Cyprus bailout deal
    * Little impact from better-than-expected German ZEW

    By Gertrude Chavez-Dreyfuss
    NEW YORK, March 19 (Reuters) - The euro dropped to its
lowest in more than three months against the dollar on Tuesday
as investors nervously awaited a vote in Cyprus on a
controversial bank deposit levy that renewed fears about euro
zone instability.
    A Cyprus government spokesman said a plan to levy taxes on
bank deposits, crucial for the country to secure financial aid,
was unlikely to be approved by parliament on Tuesday. The House
of Representatives was expected to meet at 1600 GMT.
    Rejection of the measure would push the island closer to a
default and a banking collapse that could have repercussions
across the euro zone. 
    Traders cited a Market News International report on Tuesday
quoting the Central Bank of Cyprus as saying that if the bill is
not approved by parliament, it would leave the euro. There was
also talk Cyprus' finance minister has offered to quit, all of
which weighed on Europe's common currency. 
    Cyprus' problems injected fresh volatility into financial
markets, not only undermining the euro and European shares
, but also supporting safe-haven German bunds.
    Some strategists, however, downplayed Cyprus' impact on the
euro zone, even though there may be some uncertainty right now.
    "Cyprus is a small country and it's small enough to fail,
but Italy is not," said Tom Higgins, global macro strategist and
director of macroeconomic research at Standish Asset Management
in Boston. Standish oversees $167 billion in assets.
    "If Cyprus leaves the euro, I don't think that poses a
problem for the broader euro zone. I don't think this will lead
to a general shift in risk sentiment."
    Higgins did say, however, that Standish was a little
cautious about its peripheral holdings right now -- namely,
Italy, Spain, Portugal, and Ireland -- because of the Cyprus
situation.
    "But we think this is an area of opportunity for us if
spreads widen (relative to German bunds), but we haven't really
seen significant widening," he added, suggesting that the Cyprus
story has had muted impact.
    The single currency fell to $1.2855, its lowest since
November 22. It was last at $1.2868, down 0.7 percent.
    Sebastien Galy, currency strategist, at Societe Generale in
New York remained hopeful, convinced that the impact has been
limited so far.
    "If you look at the bond market, it looks to me that there
is limited contagion at this point in time."
    Even though German bunds were higher, Spanish and Italian
bonds were generally holding steady on the day, nothing crazy.
Spanish 10-year yields were flat at 5.04 percent,
while their Italian equivalents were slightly
higher at 4.71 percent.
    Some analysts said the market remains insulated by the
European Central Bank's as-yet untested promise to buy
government bonds in potentially unlimited amounts, if necessary,
to help stabilize financial markets.
    Earlier, the euro briefly gained after a slightly
better-than-expected German ZEW economic sentiment survey, but
demand was hampered by worries about Cyprus. 
    Against sterling, which is currently being bought as a
shelter in times of heightened uncertainty in the euro zone, the
euro fell to a five-week low of 85.02 pence. It was
last at 85.11 pence, down 0.9 percent.
    The euro also retreated against the Swiss franc, dropping
0.6 percent on the day to 1.2180 francs.
    
    UPHILL TASK
    Analysts said the unprecedented plan to impose taxes on
citizens' savings in Cyprus, announced over the weekend, had
rattled savers in larger European countries also burdened by
heavy debts, like Spain and Italy.
    As a result, the more liquid dollar and the Japanese yen,
often sought during times of financial instability and economic
stress, should remain supported.
    The dollar index, which measures the greenback
against a basket of currencies, was up 0.4 percent at 82.987. 
    The dollar slipped 0.2 percent versus yen at 94.98 yen
, with the Japanese currency likely to be driven by any
comments from incoming governor of the Bank of Japan Haruhiko
Kuroda, who assumes the post on Wednesday.
    Expectations are huge for Kuroda to put in place an
aggressive monetary policy to try and lift Japan out of
deflation and which is likely to weaken the yen.  
    Market players said if the situation deteriorates in Cyprus
the safe-haven yen could regain ground, pushing the dollar
further away from last week's 3-1/2 year high of 96.71 yen.
    Meanwhile, the U.S. economy continued to show outperformance
on Tuesday, with housing starts rising last month and new
permits for construction climbing to their highest in more than
four years. 
    The report briefly boosted the dollar against the yen.
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