* Cyprus clinches last-ditch deal with international lenders
* Deal endorsed by euro zone finance ministers
* Euro's bounce likely to draw sellers
By Anirban Nag
LONDON, March 25 The euro bounced on Monday
after Cyprus's deal with its lenders removed the immediate
threat of financial meltdown but gains ran out of steam as
investors focused on the grim outlook for the euro zone economy.
Worries about a broad euro zone slowdown, political
uncertainty in Italy, and prospects of the European Central Bank
easing monetary policy in coming months to support growth were
expected to weigh on the currency.
The euro was flat on the day at $1.2990, off a
session high of $1.3050, and not far from a four-month low of
$1.28435 set last Tuesday as investors took profits on its rise.
The euro was marginally higher at 123 yen, well
below the Asian high of 123.85 yen.
The deal for Cyprus, which was endorsed by euro zone finance
ministers, includes plans to shut down the island's second
largest bank in return for a 10 billion euro ($13 billion)
The plan involves winding down Popular Bank of Cyprus, also
known as Laiki, and shifting deposits below 100,000 euros to the
Bank of Cyprus to create a "good bank". Deposits above 100,000
euros in both banks, which are not guaranteed, will be used to
resolve Laiki's debts and recapitalise the Bank of Cyprus.
The agreement came hours before a deadline to avert a
collapse of the banking system in Cyprus after the European
Central Bank had threatened to cut off liquidity support on
Monday. The deal did, however, remove immediate concerns that
Cyprus might be forced to exit the euro zone.
While the bailout deal initially pushed the euro higher,
analysts questioned whether it would instil confidence among
international investors, who could see it as a template for
future bailouts in bigger euro zone countries with struggling
"A deal to avoid default was expected. But this sets a
dangerous precedent for the euro zone," said Peter Kinsella,
currency strategist at Commerzbank, who expects the euro to
weaken against the dollar.
"It is very worrying that expropriation of private sector
capital is taking place. It increases the risk of a bank run and
when it next happens it is unlikely that ECB policies of
(providing) back stop will work then."
Many in markets were sceptical about the euro's outlook
especially when the economy is facing recession. By contrast,
the United States is showing evidence of a sustained pick up,
pushing interest rate differentials in favour of dollar assets.
"People are focusing on European growth and the structural
problems that are going to impede European growth," said Sim Moh
Siong, FX strategist for Bank of Singapore.
"We're starting to see a greater contrast between U.S.
growth and European growth. That contrast, I think, will
continue to weigh on the medium-term outlook for the euro," he
said, adding that the euro could face short-term resistance at
The yen, which tends to rise in times of financial market
stress, retreated broadly as the worries over Cyprus eased. The
dollar strengthened 0.2 percent to 94.65 yen.
Market expectations that he Bank of Japan will unveil
aggressive monetary stimulus at its next policy meeting on April
3-4, the first under new BOJ Governor Haruhiko Kuroda, are seen
likely to support the dollar against the yen in the near term.
Analysts say, however, that with expectations for drastic
BOJ monetary easing already high, the dollar could run into some
selling if policymakers disappointed at next week's meeting.
With the yen under such pressure, the dollar hit a 3-1/2
year high of 96.71 yen on March 12, marking a gain of roughly 22
percent for the greenback compared with mid-November.