NEW YORK: Fear Europe's debt crisis is spreading sent the euro to a two-month trough against the dollar and a record low against the Swiss franc on Monday, May 23 and traders said the currency's decline may not be over yet.
Markets worried about Spain's commitment to fiscal austerity after the ruling Socialist Party lost in regional elections. Italy suffered a credit outlook downgrade.
That added to worries about Greece. The government said it would speed up privatization of state firms and adopt other new measures to cut the deficit, but investors worry it may yet have to restructure debt.
Traders responded by pushing the euro through important support at $1.40, and analysts said selling should continue this week, provided U.S. economic data does not disappoint investors.
"We have a confluence of negative events....All of that is compounding to create this toxic mix for the euro," said Mark McCormick, currency strategist at Brown Brothers Harriman.
The euro fell as low as $1.3968, its weakest showing since mid-March, after breaking below $1.40, a key psychological level and roughly its 200-week moving average.
It bounced back to $1.4048, partly helped by bids from Asian central banks, but remained down 0.7 percent on the day.
The euro fell to 1.2323 Swiss francs, its lowest since the euro zone single currency was launched in 1999. Selling accelerated after stop-loss orders were triggered below 1.24, while an option barrier was taken out at 1.2350.
It fell 0.5 percent to 115.10 yen. The dollar rose 0.3 percent to 81.99 yen.
Euro selling pressure grew after spreads on benchmark Spanish, Italian and Greek government bonds widened against German benchmarks as investors dumped the bonds of weaker euro zone countries in favor of safer German debt.
OPTIONS SIGNAL DOWNSIDE
The options market hinted at more euro selling. Euro/dollar one-month implied volatility jumped to 13.1 percent from 11.70 percent Friday, suggesting trading may get more erratic if euro selling continues.
One-month euro/dollar risk reversals rose to 1.8 from 1.45 in favor of euro puts. The rising premium to protect against more euro losses suggests more selling ahead.
Brad Bechtel, managing director of Faros Trading, said the euro/dollar is likely trading at the bottom of a new range and the consolidation could continue in coming weeks with "plenty of nasty head fakes" in both directions.
The dollar was a big beneficiary of euro weakness, hitting a seven-week high of 76.366 .DXY against a currency basket.
UBS strategist Geoffrey Yu said the bank's base case for a firmer dollar was starting to play out in currency markets, an outlook he attributed to worries about Greece and investors getting ready for the end of the Fed's QE2 program in June.
While the Fed is not expected to lift interest rates soon, the end of its $600 billion Treasury buying program will cut the amount of dollars in the system and could push up bond yields, which would make the greenback more attractive.
But dollar gains could be brief if concerns about the U.S. fiscal deficit and patchy economic data resurface. U.S. durable goods, housing and GDP data are due this week.
"It's possible that people will be reminded that the Fed is going to remain on hold and the European Central Bank is probably going to hike in July," said BBH's McCormick. "Maybe we can form a base around $1.39 and push the euro back up." - Reuters
Markets worried about Spain's commitment to fiscal austerity after the ruling Socialist Party lost in regional elections. Italy suffered a credit outlook downgrade.
That added to worries about Greece. The government said it would speed up privatization of state firms and adopt other new measures to cut the deficit, but investors worry it may yet have to restructure debt.
Traders responded by pushing the euro through important support at $1.40, and analysts said selling should continue this week, provided U.S. economic data does not disappoint investors.
"We have a confluence of negative events....All of that is compounding to create this toxic mix for the euro," said Mark McCormick, currency strategist at Brown Brothers Harriman.
The euro fell as low as $1.3968, its weakest showing since mid-March, after breaking below $1.40, a key psychological level and roughly its 200-week moving average.
It bounced back to $1.4048, partly helped by bids from Asian central banks, but remained down 0.7 percent on the day.
The euro fell to 1.2323 Swiss francs, its lowest since the euro zone single currency was launched in 1999. Selling accelerated after stop-loss orders were triggered below 1.24, while an option barrier was taken out at 1.2350.
It fell 0.5 percent to 115.10 yen. The dollar rose 0.3 percent to 81.99 yen.
Euro selling pressure grew after spreads on benchmark Spanish, Italian and Greek government bonds widened against German benchmarks as investors dumped the bonds of weaker euro zone countries in favor of safer German debt.
OPTIONS SIGNAL DOWNSIDE
The options market hinted at more euro selling. Euro/dollar one-month implied volatility jumped to 13.1 percent from 11.70 percent Friday, suggesting trading may get more erratic if euro selling continues.
One-month euro/dollar risk reversals rose to 1.8 from 1.45 in favor of euro puts. The rising premium to protect against more euro losses suggests more selling ahead.
Brad Bechtel, managing director of Faros Trading, said the euro/dollar is likely trading at the bottom of a new range and the consolidation could continue in coming weeks with "plenty of nasty head fakes" in both directions.
The dollar was a big beneficiary of euro weakness, hitting a seven-week high of 76.366 .DXY against a currency basket.
UBS strategist Geoffrey Yu said the bank's base case for a firmer dollar was starting to play out in currency markets, an outlook he attributed to worries about Greece and investors getting ready for the end of the Fed's QE2 program in June.
While the Fed is not expected to lift interest rates soon, the end of its $600 billion Treasury buying program will cut the amount of dollars in the system and could push up bond yields, which would make the greenback more attractive.
But dollar gains could be brief if concerns about the U.S. fiscal deficit and patchy economic data resurface. U.S. durable goods, housing and GDP data are due this week.
"It's possible that people will be reminded that the Fed is going to remain on hold and the European Central Bank is probably going to hike in July," said BBH's McCormick. "Maybe we can form a base around $1.39 and push the euro back up." - Reuters
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