FOREX-Euro at 4-month low vs US dollar, anxiety over Cyprus deal

Mon Mar 25, 2013 3:20pm EDT

Related Topics

* Euro losses accelerate after Dutch minister's comments

* Cyprus clinches last-ditch deal with international lenders

* Eurogroup says Cyprus measures are a specific case

* Economic concerns to weigh on euro

By Daniel Bases and Julie Haviv

NEW YORK, March 25 (Reuters) - The euro fell against the U.S. dollar and the Japanese yen on Monday as brief enthusiasm brought on by Cyprus' last-ditch deal with its international lenders swiftly segued into broader fears about the region's banking sector.

Euro losses sharply accelerated after Dutch finance minister Jeroen Dijsselbloem, who heads the Eurogroup, told Reuters and the Financial Times that the rescue program agreed for Cyprus represents a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors.

Dijsselbloem appeared to backtrack from his comments later on Monday, saying Cyprus was a specific case with exceptional challenges.()

"Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used," according to a statement issued on the Council of Europe's website.

However, the damage to the euro was done by the earlier remarks, market analysts said.

"The comments from Dijsselbloem about this being a template for future bank restructurings spooked the market. It went from Cyprus being a unique situation to a template, and that has raised the contagion concerns," said Brian Daingerfield, currency strategist at Royal Bank of Scotland in Stamford, Connecticut.

"Fear of a deposit tax could spark a capital move out of peripheral Europe into German banks or the United States. That's the real contagion risk from Cyprus," he said.

The euro slid more than 1 percent against the U.S. dollar to a four-month low of $1.2829, and fell 2 percent against the yen before retracing some of the lost ground.

In mid-afternoon New York trade the euro was last down 0.92 percent at $1.2870, far below a session high of $1.3048 set after the Cyprus deal was struck. The euro hit 120.08 yen , before rising back to 120.96 yen, still a loss of 1.44 percent on the day. The euro rose to a high of 123.85 yen during Asian trading hours.

"In the coming weeks the key thing to watch will be capital outflows out of Italy and Spain," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington D.C.

"That should severely complicate efforts by lawmakers and the European Central Bank to get financial markets calm."

The euro initially rose after Cyprus agreed to shut down its second-largest bank and inflict heavy losses on uninsured depositors, including wealthy Russians, in return for a 10 billion euro ($13 billion) bailout.

Without a deal, Cyprus's banking system would have collapsed and the country could have become the first to exit the euro zone.

"This raises an important question: Why should a depositor in any Eurozone country similarly vulnerable to a banking crisis expect to be unscathed if a Cyprus-like calamity were to befall them," said Ilya Spivak, currency strategist at DailyFX, in New York.

The euro's decline against the dollar broke through a key technical support around $1.2880, the 50 percent retracement point between the July 2012 low and the February 2013 high. The Cyprus crisis has sent the euro below that point three times in the last five trading days but it never closed below that point.

"A close below this level is important and could open up a downside move toward the $1.2600 area," said RBS's Daingerfield.

EURO TO STRUGGLE

Worries about an economic slowdown in the euro zone, political uncertainty in Italy, and prospects of the ECB easing monetary policy in coming months to support growth were also expected to weigh on the euro.

Uncertainty over forming an Italian government could hamper any substantial gains in the euro.

By contrast, evidence of sustained economic growth in the United States was pushing interest rate differentials in favor of U.S. dollar assets.

Data showed speculators increased their bets against the euro while bets in favour of the dollar rose in the latest week to their largest since the week of July 17.

The U.S. dollar fell 0.58 percent at 93.95 yen, according to Reuters data.

However, market expectations are the Bank of Japan will unveil aggressive monetary stimulus at its next policy meeting on April 3-4, the first under new BOJ Governor Haruhiko Kuroda, are seen likely to support the dollar against the yen in the near term.

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