February 14, 2013 / 1:00 PM / in 5 years

FOREX-Euro slides as economy sinks deeper into recession

* Euro falls more than 1 percent against yen and dollar
    * Single currency drops as German and French economies
    * Euro zone economy contracts more than expected
    * Investors look to G20 meeting for 'currency war' talk

    By Anooja Debnath
    LONDON, Feb 14 (Reuters) - The euro fell to a three-week low
against the dollar and dropped against the yen on Thursday after
data painted a grim picture of the euro zone economy as it
struggles with the debt crisis now in its fourth year.
    Output in the 17-country euro zone slid by 0.6 percent in
the last three months of 2012, more than the 0.4 percent decline
expected in a Reuters poll and deepening its recession.  
    The bloc's two largest economies, France and powerhouse
Germany, also shrank by more than expected in the final quarter,
casting doubt on forecasts of a recovery in early 2013.
    That bolstered inflows into safe-haven German Bunds and
fanned expectations the European Central Bank will lower
interest rates in the next few months. 
    ECB Vice President Vitor Constancio said negative interest
rates - where banks effectively pay the central bank to hold
their cash securely - were still a possibility, although no
decision has been made. 
    The euro was down 1 percent on the day against the dollar
, hitting a three-week low of $1.3315, well below a
one-week high of $1.3520 struck on Wednesday and moving further
away from its 15-month high of $1.3711 hit on Feb. 1.
    Support was cited at around $1.3260, its 55-day moving
average, with stop-loss sell orders below that. 
    Against the yen, the euro fell to as low as
124.01 yen. It was last trading down more than 1 percent at
124.29 yen. 
    "There are quite a few people out there who are nervous
about the scales the euro has gone to and then this morning's
growth data kicked it all off (euro losses)," said Neil Mellor,
currency strategist at Bank of New York Mellon. 
    "This is however a periodic sell-off. Right now people will
look to buy on the dip unless there is more bad data."
    Mellor said although the euro would not see a sustained fall
just yet, at some point this year it could nurse consistent
losses, judging by the fundamentals in the euro zone. 
    While financial conditions in the euro zone have shown an
improvement and figures earlier in the year from Germany showed
some signs the economy was stabilising, peripheral euro zone
countries have continued to struggle in the face of tough
austerity measures. 
    Thursday's data also showed the recessions in Italy,
Portugal and Greece had worsened.
    "The GDP numbers were weaker than expected and while it's
not dramatic, going forward if data continues to weaken and does
not reflect the improved financial conditions, we may see some
monetary policy response from the ECB," said Paul Robson,
currency strategist at RBS.
    Those worries are likely to pin the euro down, he said. 
    The euro has risen 1 percent against the dollar and 9
percent against the yen this year after banks repaid some crisis
loans to the ECB, effectively tightening liquidity while other
major central banks have been printing more money.
    G20 IN FOCUS
    Investors will stay cautious on the euro given the risk of a
tough statement on currencies from a G20 summit in Moscow this
weekend. Speculation has continued that Japan might come under
pressure to slow the yen's slide.
    The Group of Seven nations said this week that fiscal and
monetary policies must be directed at domestic economies and not
at targeting exchange rates.
    But confusion reigned after a G7 official said the statement
was aimed at Tokyo, a comment that prompted the yen to surge on
a volatile foreign exchange market. Other G7 countries later
said it should be taken at face value. 
    Against the yen, the dollar, was down 0.1 percent at
93.30, well below a 33-month high of 94.465 set on Monday. 
    Earlier, the Bank of Japan kept policy steady as expected
and revised up its assessment of the Japanese economy. Some
believe the bank may hold off on expanding stimulus next month
and wait until its first rate review under a new governor,
scheduled for April 3-4.
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