May 9, 2012 / 11:01 AM / in 5 years

FOREX-Euro clouded by Greece and Spain worry

4 Min Read

* Political uncertainty in Greece, Spain banking woes hit euro

* Options-related demand may support in near-term

* NZ dollar, Australian dollar hit four-month lows

By Neal Armstrong

LONDON, May 9 (Reuters) - The euro fell close to a recent three-month low versus the dollar on Wednesday and the safe haven yen rose broadly amid worries over the impact on the euro zone stemming from political turmoil in Greece and the fragility of Spain's banking sector.

The euro remained under widespread pressure after the leader of Greece's Left Coalition party said on Tuesday that the country's commitment to a European Union/International Monetary Fund rescue deal had become null and void.

Greece's two main pro-bailout parties failed to win a majority in weekend elections, leaving questions over the country's ability to avert bankruptcy and stay in the euro.

Added to instability in Greece, French President-elect Francois Hollande has advocated an approach to tackling the debt crisis centered more on growth, which may create tensions with Germany's insistence on fiscal austerity.

Wednesday's moves suggest the political uncertainty is causing a broader retreat from risky assets. The New Zealand and Australian dollars, both sensitive to shifts in investor risk appetite, hit four-month lows versus the U.S. dollar.

"We still think the euro will head lower with $1.2950 the level to break in the near-term," said Lauren Rosborough, Senior FX strategist at Societe Generale, who have a medium-term target of $1.2500.

The euro fell 0.2 percent to $1.2980, closing in on a three-month low near $1.2955 touched on Monday. Technical analysts said the euro had found support on Monday around the 61.8 percent retracement of the it's 2012 rally at $1.2953.

The euro could fall towards $1.28-$1.29 over the next few weeks, although its drop is expected to be gradual given many investors are already short of the common currency, market players said.

Options traders said the euro may receive some support because of potential demand for euros related to option barriers at $1.2950 and below. The existence of such barriers means options traders might step in to buy the euro if the currency dips close to those levels.

Overall however the path for the euro was likely to be down. Added to the threat of a Greek exit from the euro, the bleak outlook for Spain's troubled banking sector continued to spook bond investors, pushing yields on Spanish 10-year bonds back above six percent on Wednesday.

"In the next four weeks we should know who is controlling Greece, whether or not it runs out of money or chooses to adhere to its bailout terms and how the Spanish government plans to sort out its banking sector," said Kathleen Brooks, Research Director at FOREX.com.

"There are high levels of market risk associated with all of these events, which we believe is euro negative."

Yen in Demand

A souring in investor appetite for risk gave broad support to the low-yielding yen which tends to rise when investors look to park their money in safer assets.

The euro was down 0.5 percent at 103.35 yen, while the Japanese currency climbed to a two-and-a-half month high versus the dollar of 79.61 yen on trading platform EBS.

The dollar itself remained supported against a basket of currencies by its own status as a safe haven, with the dollar index up 0.2 percent at 79.943.

The Australian dollar was down 0.5 percent to $1.0066 , having touched a low of $1.0052 at one point, the lowest level in more than four months. The New Zealand dollar also touched a four-month low at $0.7842.

The Australian dollar fell below 80.20 yen at one point, the lowest level since January.

Implied option volatilities on Aussie/yen soared to a one-month high above 13 percent as market players scrambled to protect themselves against further declines in the Australian dollar.

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