FOREX-Euro falls to near 4-month low on Cyprus uncertainty

Tue Mar 19, 2013 4:42pm EDT

Related Topics

* Cyprus's parliament rejects bank levy proposal
    * Euro poised to see further near-term losses
    * Dollar, yen gain on safe-haven demand

    By Wanfeng Zhou
    NEW YORK, March 19 (Reuters) - The euro dropped to near a
four-month low against the U.S. dollar on Tuesday and looked
poised to extend losses as uncertainty about Cyprus reignited
fears about the future of the euro zone currency.
    Cyprus's parliament overwhelmingly rejected a proposed levy
on bank deposits as a condition for a European bailout, throwing
efforts to rescue the latest casualty of the currency area's
debt crisis into disarray. 
    The euro trimmed losses on the news, but the move was
limited as concerns remained about whether the island country
will receive the bailout it needs to avoid a debt default.
    "It leaves Pandora's Box wide open," said Mike Moran, senior
currency strategist at Standard Chartered in New York. "If
policymakers initially thought it was OK to tax depositors as
heavily as they first suggested, one just doesn't know what plan
B or C might be.
    "Unless we have a swift resolution, this will weigh on the
outlook for the currency, and peripheral bond yields will come
under pressure," he said.
    The rejection brought the east Mediterranean island, one of
the smallest European states, to the brink of a financial
meltdown. EU countries said before the vote that they would
withhold 10 billion euros ($12.89 billion) in bailout loans
unless depositors in Cyprus shared the cost of the rescue.
    The euro fell as low as $1.2843, according to Reuters
data, its lowest level since Nov. 22, after breaking key support
around $1.2870, its 200-day moving average. It was last down 0.5
percent at $1.2894.
    The currency trimmed losses briefly after the Cyprus vote 
when the European Central Bank said it was in contact with its
IMF and EU partners and remained committed to providing
liquidity within existing rules.
    The unprecedented plan to impose taxes on citizens' savings
in Cyprus, announced over the weekend, sparked fears of a bank
run and fueled speculation that larger European countries such
as Spain and Italy might do the same should they need financial
aid.
    Goldman Sachs, in a note to clients, said short positioning
in the euro is not stretched yet and that implied volatility
remains at levels well below those seen in past periods of
stress, suggesting a slide to $1.25 or even lower in the
euro/dollar is "entirely possible".
    Still, the firm said it remains constructive on the euro in
the medium term, saying the Cyprus crisis will provide an entry
point for long euro positions.
    "Cyprus is very small compared to the overall euro zone with
strong financial linkages to non-euro zone countries," Goldman
said. "In many respects this make Cyprus a special case with
less obvious contagion risks when compared to previous bailouts
of euro zone countries."
    Some strategists 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. 
    The euro fell 0.5 percent against the British pound to 85.38
pence after hitting a five-week low. Sterling has been
bought as a shelter in times of heightened uncertainty in the
euro zone. Against the Swiss franc, the euro declined 0.4
percent to 1.2211 francs.
    Uncertainty about the euro zone benefited the U.S. dollar
and Japanese yen, often seen as safe-haven currencies.
    The dollar index, which measures the greenback
against a basket of currencies, was up 0.3 percent at 82.911,
not far from a seven-month peak of 83.166 set on Thursday.
    Against the yen, the euro slid 0.6 percent to 122.57
. The dollar lost 0.2 percent to 95.07 yen.
    Analysts said the yen is vulnerable to any comments from
Haruhiko Kuroda, who becomes governor of the Bank of Japan on
Wednesday. Expectations are high that Kuroda will put in place
an aggressive monetary policy to try and lift Japan out of
deflation.
    Investors are also turning their focus to the end of a
two-day U.S. Federal Reserve policy meeting on Wednesday. The
Fed looks set to keep buying $85 billion a month in mortgage and
Treasury bonds in an effort to encourage investment and bolster
a weak economic recovery.
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