REFILE-FOREX-Euro edges higher but vulnerable as Cyprus concerns persist

Tue Mar 26, 2013 12:13pm EDT

Related Topics

* Euro trades near 4-month low vs dollar

* Worries grow over Cyprus deal fallout

* Euro hits multi-month low versus growth-linked currencies

* Sellers to emerge on any euro rebounds

By Julie Haviv

NEW YORK, March 26 (Reuters) - The euro on Tuesday crept a touch above its four-month low hit on Monday against the dollar, remaining vulnerable to concern that investors may shun euro zone assets or withdraw money from banks in countries like Spain and Italy.

Concerns over stability of banks in those countries followed Cyprus' announcement on Monday that it would levy deposits above 100,000 euros in two of Cyprus' largest banks to help clinch an EU bailout.

Adding to investors' concerns, the European Commission said on Tuesday that it might be possible for large uninsured depositors to be "bailed-in" as part of the future resolution of a bank under a new draft EU law.

Stronger-than-expected data on U.S. home prices and manufactured good orders underscored the divergence between the United States and the bleak outlook for the euro zone economies.

The euro last traded at $1.2870, up 0.2 percent on the day recovering from a dip into negative territory, not far from Monday's low of $1.2829, its lowest since Nov. 22.

Many traders said they remained sellers of euros on any euro rebound while large option expiries were reported at $1.2750.

In Tuesday trade, the euro also hit multi-month lows against growth-linked currencies like the Australian and New Zealand dollars.

The euro slid on Monday after the head of the Eurogroup, Jeroen Dijsselbloem, said the rescue plan agreed for Cyprus will serve as a model for dealing with future banking crises.

He later appeared to backtrack, saying Cyprus was a specific case with exceptional challenges, which helped to prevent further sharp losses but it still left investors wary.

"That notion unsettled traders, leading many to worry that the rich investor might pull capital from other parts of Europe with vulnerable banking sectors, such as places like Italy and Spain," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington D.C.

"Adding to the euro's bearish makeup is the region's struggle to recover from recession, and concern that political instability in Italy might soon lead to a credit ratings downgrade," he said.

The deal for Cyprus involves raiding deposits above 100,000 euros in two of Cyprus' largest banks, which are not guaranteed, to cover debts of Popular Bank of Cyprus, also known as Laiki, and to recapitalize Bank of Cyprus.

"The developments yesterday were quite negative for the euro as it looks to be a bit of a change in policy approach within Europe with respect to bailouts. They seem to be putting the emphasis onto investors rather than tax-payers," said Ian Stannard, head of European FX strategy at Morgan Stanley.

"That is going to keep the euro under pressure as it could well deter foreign investors from returning to peripheral European assets," he said, adding that he expects the euro to test the $1.27-$1.2660 level in the coming days.

Separate U.S. economic reports on Tuesday showed demand for long-lasting manufactured goods surged in February and single-family home prices started the year with the biggest annual increase in six-and-a-half years.

The U.S. economy, however, is not out of the woods as other data showed consumer confidence tumbling in March while sales of new U.S. single-family homes fell more than expected in February after hefty gains the previous month.

In Cyprus, the scheduled reopening of banks has been postponed to Thursday from Tuesday and even then they would be subject to capital controls to prevent a run on deposits.

BOJ IN FOCUS

Earlier, the new BOJ Governor, Haruhiko Kuroda, reaffirmed his commitment to bold monetary easing to achieve 2 percent inflation.

Falls in the yen, which tends to rise in times of financial market stress, were limited, however, due to worries over Cyprus and the broader euro zone.

The dollar last traded at 94.18 yen, nearly flat on the day and far below a 3-1/2-year high of 96.71 yen hit on March 12. The euro was up 0.1 percent at 121.16 yen, staying above Monday's one-month low of 120.08 yen.

Analysts also said with market players already expecting drastic measures at the April 3-4 BOJ meeting, the yen could rebound if policymakers fail to produce a decision that matches those expectations.

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