November 7, 2011 / 1:17 PM / 8 years ago

FOREX-Euro drops as Italy in spotlight, Swissie slides

* Italian spreads widen, put euro under pressure
    * Euro bids seen around $1.3660, options suggest more
    * Franc slides on Swiss deflation; SNB ready to weaken

    By William James	
    LONDON, Nov 7 (Reuters) - The euro fell on Monday as the
focus of the region's debt crisis shifted to Italy, with a
short-term rebound on speculation Prime Minister Silvio
Belusconi could resign reversing when the talk was denied. 	
    The safe-haven Swiss franc tumbled against the euro
 and the dollar after the Swiss National Bank
chairman suggested the franc was still overvalued against the
single currency, reviving speculation the SNB may raise the 1.20
franc floor on the euro/Swiss exchange rate. .	
    Analysts said the franc's recent gains had been driven
mainly by euro zone developments, and Swiss policymakers would
take that into account before deciding whether to raise the
floor. But with data showing deflation in October, the SNB had
room to take more measures to weaken the franc. .	
    Investors shifted their focus from Greece's attempts to get
its bailout programme back on track to the region's third
largest economy, Italy, where Berlusconi was fighting for his
political future.	
    The euro stood at $1.3755, down 0.3 percent on the
day, having recovered from a session low of $1.36818 on reports
that Berlusconi may resign that also boosted Italian bond and
stock markets. A senior party source said Berlusconi had
dismissed the rumours. 	
    "A new government, or another leader could probably have
more support from the parliament and bring more reforms," said
Marcus Hettinger, global FX strategist at Credit Suisse.	
    "(But)from the currency side I don't see why that would have
a long-lasting positive effect. Growth is basically what is
needed everywhere to reduce deficits."	
    Traders cited talk of momentum stops at $1.3670/80 with bids
said to be lurking around $1.3660.	
    The Italian 10-year government bond yield hit its widest
since 1997 on Monday, a day before Berlusconi faces a
parliamentary vote with rebels threatening to bring down his
government over its failure to adopt structural reforms. 	
    In a sign that markets already see more problems for the
euro, option traders said there was some interest in
longer-dated euro put options. In addition, one-month risk
reversals were still not far from a record high
in favour of bets on euro falls versus the dollar.	
    Greece's main political parties clinched a deal to run a
coalition government, but any relief impact on the euro or other
assets was fleeting, with Italy the next potential flashpoint.	
    A debt meltdown in Italy would pose a far graver risk to the
17-nation currency bloc than Greece. With Rome's borrowing costs
soaring and 1.9 trillion euros in public debt, it is too large
to bail out.	
    Morgan Stanley strategists said in a trading recommendation
they expect a renewed move down in the euro, targeting the
$1.3365 area and then the $1.3100 area last seen at the
beginning of October. They lowered their recommended entry level
for euro/dollar shorts to $1.3760.	
    Weak economic data on Monday soured the near-term outlook
for the euro. German industrial output fell by an above-forecast
2.7 percent, adding to signs that Europe's biggest economy was
    Swiss prices fell for the first time in two years in
October, boosting the case for policymakers to act again and
curtail the franc's gains.	
    "The CPI numbers will add pressure on the SNB to back up its
words and the markets are aware of that," said Jeremy Stretch
head of currency strategy at CIBC World Markets	
    The euro was last up 1.1 percent on the day at 1.2333 francs
 . The dollar gained more than 1.7 percent on the day at
0.8976 francs , rising to 0.90310 on EBS.	
    Societe Generale said in a note demand for short-dated
topside strikes in the euro/Swiss franc pair was driving 1-month
risk reversals for euro calls higher , suggesting
 a greater skew towards franc weakness.	
    The dollar index was up 0.1 percent at 77.038.
Against the yen, the dollar was a tad lower at 78.05 yen 
with bids cited around 78 yen.
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