FOREX-Euro edges up versus dollar but Cyprus concerns weigh

Thu Mar 28, 2013 8:50am EDT

Related Topics

* Euro trades near four-month lows vs dollar
    * Cypriot banks open amidst tight capital control measures
    * Italy's funding costs rise as political worries persist
    * Yen slide loses downward momentum as BOJ meeting awaited

    By Anooja Debnath
    LONDON, March 28 (Reuters) - The euro traded near four-month
lows against the dollar on Thursday, remaining vulnerable to the
crisis in Cyprus where banks reopened after the imposition of
capital controls. 
    The euro has been undermined this week by concerns that
Cyprus's $10 billion euro rescue deal, which will leave big
depositors and private bondholders with huge losses, could
become a template for future bank bailouts in the euro zone.
    That could encourage anxious investors to sell euro zone
assets and prefer the safety of the dollar, the yen,
the Swiss franc or even the British pound.
    Those concerns along with continued political uncertainty in
Italy, and a weak economic outlook across the euro zone would
keep the euro pinned down, analysts said. Rising bond yields in
Slovenia, a possible next pain point for the euro
zone, also hurt the currency.
   The euro was up 0.2 percent on the day at $1.2800,
within site of a four-month low of $1.2750 hit on Wednesday.
Traders said month-end demand from investors rebalancing their
bonds and stocks portfolio would offer it some support, but any
bounce towards Wednesday's high of $1.2867 could see fresh
selling.
    "Investors have been focusing on the events in Cyprus and
political uncertainty in Italy and this has weighed on the
euro," said Michael Sneyd, FX strategist at BNP Paribas. 
    However, he said that the markets have perhaps been a bit
too aggressive on betting against the euro, so it remained
vulnerable to a short squeeze higher in the near term on any
positive news out of the bloc.
    Banks in Cyprus opened for the first time in nearly two
weeks on Thursday under tight controls to prevent a run on
deposits. Although these measures prevented a rush of flows out
of the island's banks, some analysts said curbing the free flow
of cash in Cyprus was bad for the bloc. 
    "Economic and monetary union across the entire euro zone no
longer exists. Even though the country (Cyprus) is very small,
policymakers' willingness to suspend cross-border euro
convertibility is a meaningfully negative signal for the euro
zone," George Saravelos, FX strategist at Deutsche Bank, said in
a note.  
    Apart from worries in Cyprus, political confusion in Italy
saw its borrowing costs rise on Wednesday and hurt the euro. 
    Italian centre-left leader Pier Luigi Bersani faced only a
slim hope of forming a government after talks with rival party
leaders ended with rejection from Beppe Grillo's 5-Star
Movement. 
        
    YEN STEADY
    Given the problems in the euro zone, investors chose the
safety of the more liquid yen. The euro was up 0.1 percent
against the Japanese currency at 120.80 yen,
recovering slightly from a one-month low of 119.745 hit earlier
in the day. 
    The yen also gained on talk of repatriation flows by
Japanese investors before the end of the financial year on March
31. That gave the currency a reprieve after a period of
sustained weakening due to expectations - now heavily priced in
- of aggressive monetary easing by the Bank of Japan at new
governor Haruhiko Kuroda's first policy review on April 3-4.
    Some analysts see the risk for disappointment, given high
expectations of aggressive easing from the Bank of Japan. That
could give the yen a boost towards the 95 yen level after the
BOJ meeting.
    The dollar was down 0.2 percent at 94.27 yen with
bids to buy the U.S. currency cited at 94 yen.
    U.S. data including jobless claims, the final reading of
fourth-quarter gross domestic product and the Chicago PMI are
all due on Thursday and better-than-expected numbers could give
the dollar a boost.
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