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FOREX-Euro nurses losses as Cyprus remains a thorn
March 19, 2013 / 12:10 AM / 5 years ago

FOREX-Euro nurses losses as Cyprus remains a thorn

* Euro near 3-month low vs dollar as Cyprus worries remain

* Not clear if Nicosia will endorses bailout deal

* Limited contagion to other euro zone countries so far

* Euro/dollar supported above 200-day average

By Hideyuki Sano

TOKYO, March 19 (Reuters) - The euro licked wounds near three-month lows versus the dollar on Tuesday after a plan to tax bank accounts in Cyprus to help pay for the country’s bailout stoked worries it could threaten the stability of financial institutions in the euro zone.

Asian investors were relieved to see limited fallout from the Cyprus deal on other euro zone countries so far, with the uptick in Spanish and Italian debt yields contained. However, analysts were guarded about the near term.

“Looking at European and U.S. markets yesterday, the injury seems to be shallow. But it will be premature to say it will cure in just two days,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

The euro traded at $1.2945, off a three-month low of $1.2882 hit on Monday, with its 200-day moving average of $1.2875 on Tuesday serving as a strong support.

Against sterling, the euro stood at 85.75 pence, near a five-week low of 85.34 pence hit on Monday. On the yen, the common currency traded at 123.47 yen, having recovered from Monday’s low of 121.585 yen.

The euro recouped some of the losses in late Monday U.S. trade after euro zone ministers urged Cyprus to let smaller savers escape a levy on bank deposits.

However, it’s still not clear if the Cypriot parliament will endorse the plan needed to secure financial rescue or reject it, threatening a default.

The parliamentary speaker said debate on the bank levy would be delayed until 1600 GMT on Tuesday.

As Nicosia extends the bank holiday until Thursday to avert panic, market players also pondered whether savers in larger European countries will become nervous and start withdrawing funds, although there was no immediate sign of that on Monday.

Analysts at Barclays say they see limited risk of contagion to other countries.

“We consider that the scope of potential contagion to other peripheral countries in terms of deposit outflows and sovereign debt is considerably more limited than if such a decision would have been taken in previous programmes. Specifically, we consider the likelihood of a bank run in other periphery countries to be limited, including in Greece,” they wrote.

European officials have said the measure is a one-off for a country that accounts for just 0.2 percent of European output and has a banking sector that dwarfs the size of its economy due to huge non-residents’ savings lured by lax anti-money laundering laws.

The radical step on deposits had limited impact on Spanish and Italian debt on Monday. Their yield rose but stayed well within their recent ranges.

The euro’s fall also helped the dollar index edge near seven-month high hit last week. The index, which measures the dollar’s value against six major currencies, stood at 82.726, flat on the day and not far from the high of 83.166.

Against the yen, the dollar fetched 95.33 yen up slightly from late U.S. levels and off Monday’s low of 94.08 yen, which was underpinned by safe-haven demand on concerns over developments in Cyprus.

The pair is not far from 3 1/2-year high of 96.71 yen, though traders are cautious about testing that level before the outcome of the U.S. Federal Reserve’s two-day policy meeting starting on Tuesday.

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