FOREX-Euro regains footing but still vulnerable on Cyprus woes

Wed Mar 20, 2013 10:06am EDT

Related Topics

* Cyprus negotiating deal with Russia
    * British budget in focus, after BoE minutes
    * Fed meeting statement and Bernanke news conference awaited

    By Gertrude Chavez-Dreyfuss
    NEW YORK, March 20 (Reuters) - The euro rallied on Wednesday
from a four-month low hit against the dollar in the previous
session, as worries about Cyprus eased with some investors
convinced the debt-plagued country will be able to hammer out a
deal to avert a default.
    Europe's common currency, however, remained vulnerable given
the underlying uncertainty in the region and the potential risk
that what happened in Cyprus could hit other fiscally frail euro
zone countries like Spain and Italy.
    Cyprus has sought Russia's help to come up with 5.8 billion
euros after its parliament rejected on Tuesday a proposed levy
on bank deposits, which would have raised that amount. That levy
on deposits was a condition for the bailout. 
    But so far, there is no deal on Russia yet. 
    "Headline risks abound with regard to Cyprus, but investors
are focused on how it can raise the 5.8 bln euros without the
deposit tax," said Brian Dangerfield, currency strategist at RBS
Securities in Stamford, Connecticut.
    "Investors are waiting to see whether Cyprus will be able to
get some bilateral deal with  Russia, or anything related to its
natural has reserves, or selling assets. So without that tax on
bank deposits, Cyprus seems to have other options."
     The euro was last up 0.5 percent at $1.2955,
recovering from Tuesday's four-month low of $1.2843 and holding
above a key chart support level at the 200-day moving average
around $1.2873.
    One trader said Tuesday's slide was prompting a
short-covering rally which could take the euro towards $1.2960.
Any rise though could be seen as an opportunity to sell the
currency.
    Some strategists also said the European Central Bank's
assurance on Tuesday that it was committed to providing
liquidity to Cypriot banks within certain limits had helped curb
euro losses. 
    "Markets in Europe are used to getting a solution at the
very last minute," said Lutz Karpowitz, currency analyst at
Commerzbank. 
    Meanwhile, a Federal Reserve policy decision later on
Wednesday could put the euro back under pressure by highlighting
the discrepancy between an improving U.S. economy and the
fragile euro zone.
    Asset purchases and interest rates are expected to remain
unchanged. That will leave the market's focus on the statement
from the Federal Open Market Committee, the forecasts, and Fed
Chairman Ben Bernanke's comments given that economic data has
improved since the last meeting.
    There has been recent speculation that the Fed could begin
winding down asset purchases and Bernanke could be asked about
their exit strategy at a press conference following the FOMC
statement.  
    But Kathy Lien, managing director at BK Asset Management in
New York said that the FOMC statement, Fed forecasts and
Bernanke's comments could send mixed messages as it has happened
 before.
    "The FOMC statement could recognize recent improvements in
economic data and contain a more optimistic tone but economic
projections and Bernanke's comments could be more cautious,"
Lien said.
    
    BRITISH BUDGET
     In London, British finance minister George Osborne, in his
annual budget presentation, said on Wednesday Britain will
borrow more in the coming years than official forecasts showed
in December and will miss one of its two debt targets by another
year. 
    As a result, sterling turned lower in early New York
trading at $1.5152, down 0.4 percent on the day. 
    In Japan, the market was wary of any comments from Haruhiko
Kuroda, who becomes governor of the Bank of Japan on Wednesday.
Expectations are high that the BOJ will embark on a much more
aggressive monetary policy to fight deflation. 
    The dollar was up 0.5 percent at 95.59 yen, while the
euro rose 1 percent to 123.85 yen.
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