* Euro still smarting from 'Cyprus model' suspicions
* Little sign of contagion to Italy, Spain
* Yen under pressure ahead of April 3-4 BOJ meeting
By Sophie Knight and Hideyuki Sano
TOKYO, March 27 The euro stayed near a
four-month low against the dollar on Wednesday as fears about
the currency bloc's financial stability festered in the wake of
the Cyprus rescue deal, while the yen dropped on stronger hopes
for bond buying by the Bank of Japan.
The euro dropped 0.1 percent to $1.2849, not far from
the four-month low of $1.2828 hit on Tuesday.
The common currency is still suffering from suspicions that
bank depositors and bond holders may be forced to foot the bill
in future rescue deals in the euro zone, with the Cyprus bailout
used as a precedent.
Jeroen Dijsselbloem, head of the Eurogroup of finance
ministers, ignited those suspicions on Monday when he said the
rescue plan for Cyprus would serve as a model for future
euro-zone banking crises on Monday. He later appeared to
backtrack, saying Cyprus was a unique case, but the damage was
"Systemic risk remains for the euro, no matter what," said
Michiyoshi Kato, senior vice president of forex sales at Mizuho
Corporate Bank in Tokyo.
Some analysts said alarm bells could ring if the two-year
German bond yield goes negative. It is currently at 0.005 after
sliding steadily from a 9-month high of 0.29 hit in late
"The euro would likely come under further heavy selling
pressure if the yield was to drop below zero, as it didn't even
do that in the aftermath of the Greek election last year," said
Minori Uchida, senior analyst at Bank of Tokyo-Mitsubishi UFJ.
The yield on two-year German bonds last dipped into negative
territory in December, after doing so for the first time ever in
July as Spanish and Italian borrowing costs hit crisis levels.
"But if it stays positive, there will be little other
downward pressure on the euro for the moment," Uchida said.
Some analysts said the single currency could steady in time
for the Easter holidays, as there is little sign of dreaded
contagion in the euro zone's larger economies, such as Spain and
Italy, with debt yields remaining within recent ranges.
The euro edged up 0.2 percent against the yen to 121.71
on Wednesday, as the Japanese currency fell on
reinforced expectations of major stimulus from the BOJ after the
Nikkei business daily said the central bank will boost bond
buying at its policy review meeting on April 3-4.
Yen bears were further cheered after sources told Reuters
the BOJ would likely start open-ended asset purchases
immediately rather than in 2014, as originally agreed in
January, and also buy longer-dated bonds.
The news nudged the dollar up 0.3 percent to 94.72 yen,
extending its rebound from a one-week low of 93.53 yen on
"Some hedge funds were positioning for the dollar to drop
all the way to 90 yen after it broke below 94," said Kato of
Mizuho Corporate Bank. "But as it quickly rebounded, the range
could have been hiked upwards. People are searching for the next
target- though at the end of the fiscal year, no one wants to
The Aussie lost 0.1 percent to $1.047, with the
Reserve Bank of Australia's reassurance that the country's banks
are robust and prepared to meet new strict liquidity controls
further dimming prospects of a rate cut.
Helped by a stellar jobs report on March 14, the Aussie had
rallied 3.8 percent from a 7-1/2 month low on March 4 to a high
of $1.0497 on Tuesday.
While the currency added 4.5 percent in the same period
against the broadly weakening yen, analysts said it will take
equally strong data in April to push the Aussie over tough
resistance at 100 yen. On Wednesday, it gained 0.2
percent to trade at 99.23 yen.
The euro struggled against the resurgent Australian dollar,
limping up 0.1 percent to A$1.2268, still close to a four-month
low of A$1.2225 hit on Tuesday.