May 24, 2012 / 2:15 PM / 6 years ago

FOREX-Euro drops to nearly 2-year low; dollar, yen up

* Euro falls after German manufacturing PMI, Ifo surveys
    * Concerns of potential Greek exit add to bearish outlook
    * Break below $1.25 could see move towards 2010 low

    By Gertrude Chavez-Dreyfuss	
    NEW YORK, May 24 (Reuters) - The euro hit nearly two-year
lows against the dollar on Thursday, declining for a third
straight session as dour German economic data reminded investors
that no country in the region was immune from the debt crisis.	
    The German manufacturing report further unnerved investors
already worried not only about Greece but also the risk that
other similarly indebted countries such as Spain could also exit
the regional bloc or default on its debt. 	
    The euro, however, managed to recoup some losses to trade
just slightly lower on the day as investors consolidated short
positions ahead of a long U.S. holiday weekend. But any rebound
could be fleeting.	
    Paul Dietrich, chief executive officer at Foxhall Capital
Management in Orange, Connecticut said Greece's problems have
already been priced in by the market.	
    "What investors are worried about is a banking crisis in
Europe. Mainly they are looking at who is the next one to exit,"
said Dietrich. "If Spain starts looking likely that it could
leave the European Union or default on its debt, then you're
going to see a major banking crisis in Europe because European
banks hold massive amounts of Spanish debt."	
    Dietrich has retained a defensive stance in his portfolio,
with 70 percent of its holdings in short-term U.S. Treasuries.	
    The weaker-than-expected Ifo business climate index and
manufacturing PMI data for May suggested that growth in Europe's
largest economy that has helped the currency bloc dodge
recession may be starting to slow.
    Signs of a downturn across the region, banking sector
problems in Spain and the risk of contagion ensnaring bigger
economies are all combining to keep euro bears firmly in
control, with some investors targeting $1.20 in coming weeks.	
    The euro dropped sharply to $1.25155 on trading
platform EBS, its lowest level since July 2010, before
recovering to hit session highs at $1.26209 as some investors
booked profits on bearish positions initiated earlier. 	
    The euro was last at $1.2564, down 0.1 percent on he day. 
Gains in the euro zone common currency versus the Swiss franc
also helped the euro's cause against the dollar, traders said.	
    Early in New York trading, the euro jumped to 1.2075 francs
, its highest since late March on speculation that the
Swiss government is going to impose tax on deposits, traders
said. The euro last traded at 1.2034 francs, up 0.2 percent on
the day.	
    Traders reported an options barrier at $1.2500 with more
stop-loss orders cited at $1.2480.	
    The euro has lost 1.6 percent against the dollar so far this
week with sentiment already fragile after a European Union
leaders summit on Wednesday failed to shed new light on how they
might tackle the euro zone debt crisis. 	
    "After the (EU) summit without any results we have still got
a lot of uncertainty in Greece. The last thing we need in this
situation is the German economy getting into trouble," said Lutz
Karpowitz, currency strategist at Commerzbank.	
    Real money investors and macro funds have stepped up selling
of the euro in recent days as concerns Greece might quit the
euro zone intensified. Fears of a Greek exit have mounted after
an inconclusive election this month left the country on the path
to bankruptcy and raised the risk of contagion. 	
    Three officials told Reuters on Wednesday that members of
the currency bloc have been told to prepare contingency plans in
case Greece quits the euro, an eventuality that the German
central bank said would be testing but
    Greeks will vote again on June 17, with polls showing a
neck-and-neck race between parties supporting and opposing terms
of the country's international bailout, keeping markets on edge.	
    European Central Bank data showed 35.4 billion euros of net
direct portfolio investment flowed out of the euro zone in
March, suggesting investors are starting to shun the region's
    The poor German economic data led more investors to the
safety of the dollar and the yen. The euro was down 0.1 percent
against the yen at 99.86 yen, having fallen to 99.33
yen, its lowest since Feb. 1.	
    The dollar index climbed to a 20-month high of
82.362, while the greenback rose to a 15-month peak versus the
Swiss franc of 0.95959 francs on trading platform EBS.	
    The greenback was steady at 79.41 yen, showing
limited reaction after Bank of Japan governor Masaaki Shirakawa
said the central bank was resolved to maintain its ultra-loose
monetary policy but would not ease solely to weaken the yen.

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