CORRECTED-FOREX-Cyprus bailout fears drive euro to near 3-month low vs dlr

Tue Mar 19, 2013 12:35am EDT

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(Deletes incorrect reference to dollar's resistance level in second last paragraph)

* Euro near 3-month low vs dollar as Cyprus worries remain

* Not clear if Nicosia will endorses bailout deal

* Limited contagion to other euro zone countries so far

* Euro/dollar supported above 200-day average

* Dollar/yen up 0.5 pct, Aussie near 5-week high

By Hideyuki Sano

TOKYO, March 19 (Reuters) - The euro licked its wounds near three-month lows versus the dollar on Tuesday, with the plan to tax Cyprus savings accounts to help fund a bank bailout fuelling fears for the stability of euro zone financial institutions.

Asian investors were relieved to see limited fallout from the Cyprus deal on other euro zone countries so far, with the uptick in Spanish and Italian debt yields contained. However, analysts were guarded about the near term.

"Looking at European and U.S. markets yesterday, the injury seems to be shallow. But it will be premature to say it will heal in just two days," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

The euro traded at $1.2957, flat from late U.S. levels and not far from a three-month low of $1.2882 hit on Monday, with its 200-day moving average of $1.2875 on Tuesday a strong support.

But the common currency faces an uphill battle to close the yawning chart gap between Friday's close of $1.3076 and Monday's opening at $1.2950.

Against sterling, the euro stood at 85.75 pence, near a five-week low of 85.34 pence hit on Monday.

The euro recouped some of the losses in late Monday U.S. trade after euro zone ministers urged Cyprus to let smaller savers escape the proposed levy on bank deposits.

However, it is still not clear if the Cypriot parliament will endorse the plan needed to secure financial rescue or reject it, threatening a default.

The parliamentary speaker said debate on the bank levy would be delayed until 1600 GMT on Tuesday.

"If the plan is voted down, there will surely be fresh selling in the euro," said Tohru Sasaki, the head of Japan rates and FX research at JPMorgan Chase Bank.

Sasaki also noted that euro looks vulnerable as its rebound overnight was smaller than the currency's rebound after the fall triggered by a Greek election last May, when investors were shocked to find the ruling coalition failed to win a majority.

"On Monday after the Greek election, the euro almost fully recovered from a one-percent loss in Asia. But that turned out to be a high for many months to come, as the euro kept falling in the next two months and a half," he said.

STORM IN A TEACUP?

As Nicosia extends the bank holiday until Thursday to avert panic, market players pondered whether savers in larger European countries would get nervous and withdraw funds, although there was no immediate sign of that on Monday.

Analysts at Barclays say they see limited risk of contagion to other countries.

"We consider that the scope of potential contagion to other peripheral countries in terms of deposit outflows and sovereign debt is considerably more limited than if such a decision would have been taken in previous programmes. Specifically, we consider the likelihood of a bank run in other periphery countries to be limited, including in Greece," they wrote.

European officials have said the measure is a one-off for a country that accounts for just 0.2 percent of European output and has a banking sector that dwarfs the size of its economy due to huge non-residents' savings lured by lax anti-money laundering regulations.

The radical move on deposits had limited impact on Spanish and Italian debt on Monday. Their yield rose but stayed well within their recent ranges.

"Cyprus is a small country and its impact will be limited. I don't see this leading to a big risk-off moves in markets," said a trader at a Japanese brokerage.

Indeed, commodity currencies, which took a hit in tandem with the euro initially, have recouped most of losses, with Australian dollar trading at $1.0390, not far from five-week high of $1.0415 hit last week.

As broad risk sentiment turns less sour, the yen also declined broadly, giving up the gains from Monday's safe-haven buying.

The dollar rose 0.5 percent on the day to 95.70 yen.

The euro also recovered 0.6 percent to 124.04 yen , though it is still down 0.5 percent from late last week. (Reporting by Hideyuki Sano; Editing by Eric Meijer)

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