June 5, 2012 / 6:20 PM / 7 years ago

FOREX-Euro slumps on Spain warning, G7 fails to raise hopes

* Euro falls, erasing earlier gains as Spain worries grow
    * Spain's Montoro says financial markets closing to Spain
    * Options market shows rise in demand for euro puts

    By Julie Haviv	
    NEW YORK, June 5 (Reuters) - The euro fell on Tuesday as
Spain's treasury minister said high borrowing costs were closing
the country off to credit markets and investors received scant
comfort from an emergency conference call of Group of Seven
finance chiefs.	
    The euro, which rallied the previous day on euro zone
optimism, fell broadly after the G7 ministers did not unveil
concrete actions to address problems in Spain and Greece. That
disappointed investors hoping for measures. 	
    "None of these meetings have produced anything meaningful,
and with debt burdens piling up across the globe, I remain
highly doubtful that anything substantive will be implemented,
and anything that falls short of fiscal union in Europe will
allow the crisis to proliferate," said Christopher Vecchio,
currency analyst at DailyFX in New York.	
    In a later statement, the U.S. Treasury Department said G7
finance ministers discussed progress towards a financial and
fiscal union in Europe. [ID:nW1E8EM02J}.	
    The single currency was last down 0.4 percent at
$1.2442 after falling to a session low of $1.2409, more than a
cent below an earlier one-week high. On Friday, it had hit a
two-year low of $1.2286, using Reuters data.	
     "People will be happy to sell into moves above $1.25," said
Anders Soderberg, currency strategist at SEB in Stockholm.	
    The euro has recovered somewhat since weak U.S. jobs data on
Friday weighed on the dollar, feeding speculation about the
prospect of another bout of monetary easing in the United
States. But Soderberg said this was merely "a short-term break
in what now seems to be a well-established downtrend".	
    After the G7 call, investors are now waiting for an ECB
policy meeting on Wednesday, Federal Reserve chairman Ben
Bernanke's testimony to the U.S. Congress on Thursday, as well
as Greek elections and a G20 meeting in Mexico both on the
weekend of June 17.	
    The G7 talks boosted the euro earlier but it fell after
Spain's Treasury Minister Cristobal Montoro 
highlighted the funding problems facing the euro zone's fourth
largest economy. 	
    The euro was further pressured when German regulator Bafin
on Tuesday said moves to create a banking union in Europe were
premature.The euro was last down 0.1 percent at 97.83 yen.
This still left it comfortably above Friday's low of 95.57 yen,
using Reuters data, the lowest since December 2000.	
    Uncertainty about the euro was evident in the options
market, with risk reversals, a key measure of sentiment, on
one-month puts, or bets it will depreciate, trading as high as
2.325 percent versus 2.2 percent the previous day.	
    The euro's weakness also pushed implied volatility, a gauge
of expected price action, to 12.88 percent on Tuesday,
up from 12.65 percent the previous session.	
     The G7 talks prompted some market players to speculate that
the European Central Bank could opt for some form of further
monetary stimulus when it meets on Wednesday.	
    There has been some talk of a cut, although a recent Reuters
poll showed only 11 out of 73 analysts polled expected a move
this month. 	
    Traders will be looking to testimony by U.S. Federal Reserve
Chairman Ben Bernanke on Thursday for any hints on the
possibility of more quantitative easing, a negative for the
    The dollar got a boost after Japan's Finance Minister Jun
Azumi said a strong yen is damaging Japan's economy.
    The dollar was up 0.5 percent at 78.72 yen, above Friday's
3-1/2-month low of 77.65 yen, using Reuters data. Investors were
still wary, however, about the possibility of Japanese
authorities stepping in to stem the yen's rise.
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