November 9, 2011 / 2:56 PM / 6 years ago

FOREX-Euro slumps vs dollar, yen as Italian yields spike

* Doubts about Italy slam euro against major currencies
    * Markets fear ECB will be forced to do more

    By Steven C. Johnson
    NEW YORK, Nov 9 (Reuters) - The euro plunged to a one-month
low against the dollar on Wednesday as Italian borrowing costs
topped 7 percent, raising fears the euro zone's third-largest
economy would need emergency aid to finance its debt.
    The currency fell below $1.36 to its lowest since Oct. 11
and was last down 1.8 percent at $1.3585 .
    Political turmoil in Italy has thrust it to the epicenter
of the worsening euro zone debt crisis this week as markets
fret about its ability to adopt reforms to cut its debt burden
and make its economy more competitive.Similar moves preceded bailouts for Portugal and Ireland.
    "We're in crisis mode because people don't have confidence
that Italy can adopt the austerity measures and reforms needed
to make the economy more productive," said Mark McCormick, a
strategist at Brown Brothers Harriman in New York.
    Higher yields will increase pressure on the European
Central Bank to do more. Traders said the bank bought Italian
debt aggressively on Wednesday, and McCormick said it may be
forced to increase those purchases or to cut interest rates
again next month, all of which should weigh on the euro.
    The ECB cut rates to 1.25 percent last week.
    "All of this is adding to the case for more economic
weakness in the euro zone as a whole, and recent manufacturing
data suggests things are getting worse," McCormick said.
    The euro also fell 1.8 percent at 105.55 yen .
    Traders said Japanese investors have in the past been big
buyers of Italian debt and the decision to raise margins could
see many unwind those positions, adding to the euro's woes.
    The dollar was unchanged at 77.70 yen but was up 1.1
percent at 0.9049 Swiss francs .
    The euro "looks incredibly vulnerable at the moment," said
Chris Turner, head of foreign exchange strategy at ING.
"Everyone has concluded that the only buyer of Italian debt is
the ECB ... You need a much larger risk premium in the euro and
it's not clear where this is going to end."
    "We think the euro will drift lower to $1.35 in the near
term," said Stuart Frost, head of absolute returns and currency
at RWC Partners.
    Brown Brothers Harriman's McCormick said he expects the
euro to end the year at $1.29.

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