December 10, 2012 / 2:35 PM / 5 years ago

FOREX-Euro struggles as Italy's political crisis weighs

* Euro dips after Monti says will quit once budget passed
    * ECB rate cut prospects hurt euro
    * Italian turmoil threatens contagion effect on Spain
    * Fed meeting on Wednesday significant for dollar

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Dec 10 (Reuters) - The euro fell against the yen
and was flat versus the dollar on Monday after Italy's Prime
Minister said he would step down early, putting the country's
outlook in a state of flux and raising concerns about the euro
zone's near-term prospects.
    Mario Monti said on Saturday he would resign once the 2013
budget passes. An election in February looks probable, with
investors worried about who will navigate the euro zone's
third-biggest economy out of the debt crisis 
    The news pushed Italy's borrowing costs higher to 4.83
percent, the highest in roughly more than three
weeks. Top-ranking German bonds benefited, lifting prices and
pushing 10-year yields down to 1.28 percent, their
 lowest since early August. 
    "The political situation in Italy just adds to the
uncertainty in Europe and this will have a negative impact on
the euro in the coming months," said Matthew Lifson, senior
trader and analyst at Cambridge Mercantile Group in Princeton,
New Jersey.
    The euro was down 0.3 percent on the day at 106.28
yen, falling for a third straight say. It dropped as low as
105.94, its weakest in about two weeks.
    Against the dollar was the euro was flat to slightly higher
at $1.2931. Euro resistance remains at the $1.2940 level, said
Lifson, with support at $1.2885 and $1.2860.
    Some analysts noted that the bond and currency markets'
reaction to Italy's news may have been overdone given the fact
that Monti would have called for elections in a few months time
anyway. Monti's decision simply expedites the process. 
    "Given the chaotic history of Italian politics, it is almost
certain that whoever is elected Prime Minister will not be able
to exercise anywhere near the level of control over the
country's fiscal policy enjoyed by Mr. Monti," said Boris
Schlossberg, managing director of FX strategy at BK Asset
Management in New York. 
    While Italy has nearly completed its planned bond market
funding for this year, the latest political turmoil could hinder
its ability to borrow around 420 billion euros in 2013.
    There could also be an impact on neighboring Spain whose
government is studying the need for outside help.
    Concerns about core euro zone countries also weighed on the
common currency. Germany's Bundesbank last week slashed its
growth outlook for Europe's largest economy to 0.4 percent in
2013 from an early estimate of 1.6 percent. 
    Caution about possible fresh monetary easing steps from the
Federal Reserve later this week limited the dollar's advance.
    Despite turmoil in Italy, the dollar index was just up 0.1
percent at 80.312.
    "People are just positioning themselves for the last decent
week we could have in terms of data before getting into the
Christmas period," said David Bloom, global head of FX research
at HSBC. "The Fed meeting will be important." 
    Many economists expect the Fed to announce on Wednesday
monthly bond purchases of $45 billion, signaling it will keep
pumping money into the economy to bring down unemployment.
    Signs Washington policymakers are no closer to averting tax
hikes and spending cuts set to take hold next year, which
analysts say could push the U.S. economy back into recession,
also weighed on the dollar. 
    The greenback fell 0.3 percent on the day to 82.20 yen
 as traders said macro funds cut long dollar positions.
    Data showed speculators' net yen short positions last week
rose to their highest since mid-2007. With short bets already
stretched, traders said it would be difficult for the dollar to
advance against the Japanese currency. 
    But some saw a drop in the dollar as a buying opportunity.
    Morgan Stanley recommended buying dollars at 82.00 yen, with
a stop of 81.50 yen and a target of 84.00 yen. 
    The bank expected a weaker yen on the prospect of further
monetary easing by the Bank of Japan after a general election
next Sunday. 
    The opposition Liberal Democratic Party is expected to win
and this is likely to result in more pressure on the BOJ to ease

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