* Investors jittery after proposal to tax Cypriot deposits
* Focus on Cyprus parliament vote, peripheral bond yields
* Euro/dollar technical indicators show sell signal
By Gertrude Chavez-Dreyfuss
NEW YORK, March 18 The euro tumbled to a more
than three-month low against the U.S. dollar and a roughly
two-week trough versus the yen on Monday, as a bailout plan for
Cyprus that will tax bank deposits spurred contagion worries in
the euro zone.
Euro zone finance ministers demanded at the weekend that
Cypriots pay up to 9.9 percent of their bank deposits in
exchange for a 10 billion euro ($13 billion) bailout.
The move broke with previous EU protocol that citizens'
savings are sacrosanct and led to worried Cypriots emptying cash
machines on the island as they rushed to access their funds.
"The path Cyprus has chosen and the risk of a bank run has
increased contagion fears," said Camilla Sutton, chief currency
strategist at Scotiabank in Toronto. She added that Scotiabank
is keeping its year-end euro target of $1.27 against the dollar.
The speaker of Cyprus's parliament said lawmakers will vote
on the plan Tuesday, postponing the vote by a day, as the
government works on a plan to soften the blow for small savers.
Analysts said any changes to help smaller depositors could
limit euro losses, but that overall the euro would remain
The euro dropped to a three-month low of $1.2880 in
Asian trade, before paring losses to last trade down 0.9 percent
on the day at $1.2951. Traders said robust offers to sell were
at $1.2946, with most investors likely to use a bounce to
initiate fresh bets against the euro.
Scotiabank's Sutton said all the technical signals are in
"sell" territory in the euro/dollar pair, with the relative
strength indicator not yet in oversold territory.
Against the yen, the euro fell 1.2 percent,
briefly breaking through support at 121.68 yen, its 55-day
moving average. It dropped as low as 121.55, the lowest since
"If this tax is levied it will set a precedent. It raises
questions over whether other deposits will be safeguarded in
other countries," said Jane Foley, senior currency strategist at
"Euro zone politicians will be at pains today to manage down
the danger of contagion to other (peripheral) markets. The euro
will find a little bit of support from that but markets will
Yields on bonds of struggling euro zone countries like Spain
and Italy rose while those on safe-haven German bunds fell, with
investors wary of any fresh signs of contagion from Cyprus.
Reflecting that nervousness, in the options market one-month
euro/dollar implied volatilities jumped to 13.33
percent in New York trading from around 7.7 percent on Friday.
Euro/dollar one-month risk reversals which
measure the relative demand for options on the euro rising or
falling were showing a growing preference for euro weakness.
The euro fell 0.4 percent against the Swiss franc to 1.2228
francs and 9 percent against the British pound to
85.72 pence. Both the franc and the pound are bought
when risks to the euro zone debt crisis escalate.
The yen was also higher. The highly liquid Japanese currency
is considered a safe haven by many investors and sought during
times of economic uncertainty and financial market stress.
The dollar dropped to as low as 93.45 yen on
trading platform EBS where yen flows are the largest. On the
Reuters platform, the dollar/yen low was 94.03.
The pair has moved away from a 3-1/2 year peak of 96.71 yen
struck on March 12. It was last down 0.3 percent at 94.90 yen.
However, some strategists said the yen's strength would be
short-lived given bets on more aggressive easing steps from the
Bank of Japan, and expectations euro zone politicians will be
able to reassure markets.
Given the dollar's solid gains against the euro, the U.S.
currency rose 0.4 percent against a basket of currencies to
An improving economy in the United States has underpinned
the dollar in recent weeks. Data released on Friday showed U.S.
manufacturing was growing, although consumer sentiment in the
world's biggest economy faltered to its weakest in over a year
and inflation picked up.