* Common currency's 2012 low vs dlr eyed
* Political risk factors undermining euro
* Aussie dips below parity vs USD, hits 5-month low
By Nia Williams
LONDON, May 14 The euro fell to a near
four-month low on Monday as political turmoil gripped Greece,
highlighting the risk the country may exit the euro zone, while
worries about slowing Chinese and global growth drove down
Safe-haven currencies including the dollar and the Japanese
yen rose as coalition talks in Greece hit an impasse on Sunday,
increasing the chance of another election.
Euro zone industrial production unexpectedly fell in March,
adding to signs the bloc is heading into recession and further
fuelling bearish sentiment, while Spain's short-term debt costs
rose at auction and its 10-year yields soared.
The common currency fell to $1.2861 on trading
platform EBS, its lowest level since Jan. 23. It has lost 2.7
percent so far this month after losing 0.8 percent in April.
Analysts said the euro could hit the 2012 low of $1.2623 in
coming weeks, with some forecasting a break towards $1.20.
"It feels like we are coming to some sort of denouement, it
looks increasingly likely Greece will have to leave (the euro
zone). This is what is going to blight the markets for the next
few weeks," said Neil Mellor, FX strategist at Bank of New York
"The short-term target in the euro is the 2012 low and there
is very little standing in the way of some fairly big falls."
Benchmark Spanish 10-year government bond yields were
trading at 6.32 percent on Monday, closing in on the 7 percent
level that is seen as unsustainable, in a sign Greek political
instability was weighing on the euro zone periphery as a whole.
Adding to headwinds for the euro, Chancellor Angela Merkel's
conservatives suffered a crushing defeat on Sunday in an
election in Germany's most populous state, a result which could
embolden the left opposition to step up attacks on her European
Some analysts said the European Central Bank may eventually
adopt further monetary easing to support the economy, which
could add to euro weakness. With the U.S. economy still holding
up, doves in the Federal Reserve are likely to be kept at bay,
offering further support to the dollar.
"The prospects for the euro's downside have grown, and our
six-month forecast is $1.25 and $1.20 in 12 months for
euro/dollar," said Raghav Subbarao, currency strategist at
"The key driver in our opinion will be how the ECB reacts to
the situation. We expect the ECB to ease policy, maybe through
unconventional policies in coming months to support the
situation in the periphery."
Underscoring increasingly bearish market sentiment toward
the euro, data from the U.S. Commodity Futures Trading
Commission showed currency speculators increased their net short
positions in the single currency in the week ended May 8 to the
highest level since mid-February.
Traders and analysts said with many speculators already
running bearish positions against the euro, the speed of the
common currency's fall may slow in coming days.
AUSSIE BREACHES PARITY
The safe haven dollar rose, while currencies sensitive to
shifts in risk appetite came under pressure. The dollar index
rose to a two-month peak of 80.598.
The New Zealand dollar hit a four-month low of $0.7765
, while the Australian dollar dipped below
parity versus the U.S. dollar for the first time in about five
months, slipping to as low as $0.9963.
The Aussie failed to gain even after China's central bank
cut the amount of cash that banks must hold as reserves on
Saturday, freeing an estimated 400 billion yuan ($63.5 billion)
for lending to head off the risk of a sudden slowdown in the
world's second largest economy.
Broad dollar demand pushed the greenback up 0.4 percent
against the Swiss franc to a near four-month high of 0.9338
while it was steady against the yen at 79.96 yen.
Traders said the dollar also gained some support versus the
yen after Japanese Prime Minister Yoshihiko Noda told The Wall
Street Journal over the weekend that all options were on the
table for dealing with the strong yen, although he stopped short
of saying that the currency was overvalued.