July 12, 2011 / 10:37 AM / 8 years ago

FOREX-Euro slides as Italy, Spain bond yields jump

 * Euro extends losses, hits lifetime low vs Swiss franc
 * EUR/USD hits 4-mth low, safe-haven dollar climbs broadly
 * Jump in Italy, Spain yields prompts exodus from risky FX
 By Naomi Tajitsu	
 LONDON, July 12 (Reuters) - The euro stumbled to an all-time
low against the Swiss franc on Tuesday as euro zone government
bond yields vaulted higher due to deepening concerns about the
region's debt crisis, prompting investors to dump the single
currency for safer ones.	
 The euro sank 1 percent on the day to 1.1550 Swiss francs on
electronic platform EBS. Against the dollar, it hit a four-month
trough of $1.3837.	
 Heavy demand to dump the euro boosted the dollar, franc and
yen, often considered safe havens, while high-yielding
currencies including the Australian and New Zealand dollars 
took a hit.	
 Confidence is dwindling in the European Union's ability to
prevent debt problems in Greece, Ireland and Portugal from
spreading to Spain and Italy, where bond yields have surged in
recent sessions.	
 "Italy has moved very, very quickly to catch up with Spanish
yields, and the market has woken up to the fact that there's a
much larger problem. That's what precipitated the large fall (in
the euro)," said Adam Myers, senior FX strategist at Credit
Agricole CIB.	
 He added that concerns about whether Italy can undertake
budget reforms had changed the market's previous perception that
Rome was immune to the debt crisis.	
 Many in the market said the sell-off in the euro seen this
week marks a turning point in the currency market, where
investors have acknowledged that stronger countries were not
immune to the region's fiscal problems.	
 "I very much doubt the ECB, let alone the IMF, can bail out 
a country the size of Italy," Myers said.	
 Analysts said the euro would continue to take a beating as
yields rise in the wake of an emergency meeting by European
financial officials on Monday, which failed to agree fresh
action to tackle the region's debt problems. 	
 The euro was hammered lower after a jump in benchmark
10-year Spanish and Italian bond yields expanded their spreads
against safe-haven German debt to their widest since the
 By 0917 GMT, the euro traded at $1.3920.	
 Traders cited Asian sovereign demand had pulled the euro
away from its trough, along with results from an Italian bond
auction which showed Rome was able to sell one-year paper,
albeit at much higher yields than usual. 	
 The euro clawed back above $1.3906, the 200-day moving
average which was seen as a key support level. Having broken
below that level in earlier trade, a daily close below would
signal further losses.	
 The sell-off in risky currencies boosted the dollar roughly
1 percent higher versus a currency basket to 76.719, its
highest in four months. 	
 The Swiss franc and the yen also rallied, with the Swiss
unit hovering around historic highs against sterling, while
broad yen strength pushed the dollar down roughly 1 percent on
the day to 79.17 yen , its weakest since mid-March.	
 The Australian dollar fell 1 percent versus its
U.S. counterpart, while the New Zealand currency fell 2
percent. Closely linked to commodity prices and seen as a
barometer of risk demand, these currencies reversed gains made
in previous sessions.	
 The euro has already plummeted more than 4 percent against
the dollar this month, and market participants in London said
there was "very much" a sense of panic on the trading floor.	
 "Now should be the time to buy euros, but it's just too
scary," another trader said.	
 Some analysts said the euro could weaken further as the
latest IMM positioning data shows speculators added to their net
long positions in the euro, or bets on euro strength, through
last week.	
 The drop in those positions has contributed to a spike
higher in market volatility, pushing one-month euro/dollar
implied vol to around 15 percent its highest since
November 2010.	
 The premium on euro puts -- the option to sell the currency
-- also jumped, with one-month 25-delta risk reversals
 hitting 3.3 percent in favour of puts, its
highest in roughly a year.	
 Analysts said a further sell-off in the euro would ramp up
implied vol, but some argued it could hit a ceiling soon if a
strengthening view of further euro weakness leads to a growing
unwillingness to sell volatility in the currency.	
 "Acceleration towards $1.35 could ... push one-month vol
still higher," analysts at Societe Generale said in a note. 	
 "However, we believe that the market could not currently
absorb much more than 1-2 vols higher on the one-month vol, so a
level at 20 looks out of reach."	
 (Reporting by Naomi Tajitsu)	
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