Wednesday, November 2, 2011

Euro drops 3rd day as Greek referendum fans fear

NEW YORK (Nov 1): The euro slid for a third straight session against the dollar on Tuesday, hitting a near three-week low as Greece's surprise call for a referendum on an EU bailout plan fueled fears of an imminent default.

The Greek government faced possible collapse as ruling party lawmakers demanded Prime Minister George Papandreou resign for throwing the nation's euro membership into jeopardy with a shock call for a referendum.

France and Germany summoned Papandreou to crisis talks in Cannes on Wednesday to push for a quick implementation of Greece's new bailout deal ahead of a summit of the G20 major world economies.

The Greek government believes it will win a confidence vote on Friday and will hold a referendum on an EU aid deal as planned, a spokesman said after several ruling party members asked for snap elections instead.

"There appears to be little on the near-term horizon to arrest the market decline and, accordingly, our bias remains for further weakness in global currencies over the balance of the week," said Nick Bennenbroek, head of currency Strategy at Wells Fargo.

The euro ended at around $1.37, or 1.1 percent lower on the day after earlier falling to a low of $1.3608, its weakest level since October 12. Losses were curbed after French President Nicolas Sarkozy and German Chancellor Angela Merkel in a phone conversation agreed that they were committed to last week's EU decisions.

Greece's move drew a howl of protest from European leaders. Germans expressed fury and frustration, with political leaders saying it could plunge Greece into bankruptcy and force it out of the euro zone.

"They will probably face increased criticism from their European counterparts who have worked hard to strike a deal," said Kathy Lien, director of currency research at GFT Forex in Jersey City, New Jersey.

"Unfortunately in the near term, this could add pressure on the European Central Bank to cut interest rates or at least telegraph plans to do so this week," she said. "For this reason, we could see further losses in the euro."

Riskier assets fell sharply across the board, including commodities and global equities. Prices of German Bunds and U.S. Treasuries, traditional safe-havens, rose.


Both the dollar and euro are vulnerable this week given U.S. Federal Reserve and ECB policy meetings as well as a G20 summit.

The Federal Reserve could begin to prepare financial markets for further monetary easing at the conclusion of a two-day meeting that began on Tuesday, even if it refrains from any new stimulus just yet.

"We maintain that the ECB will not cut rates and given the stabilization of U.S. data the Fed should remain on the sidelines as well," said Jessica Hoversen, fx analyst at MF Global in New York.

"A lack of a rate cut from the ECB and some positive developments from the G20 may help the euro in the short run but we maintain that those gains will be short-lived."

The U.S. dollar firmed versus the yen, but was off Monday's three-month high as the impact of Japan's massive intervention faded slightly. It last traded at 78.28 yen, up 0.1 percent, with market players still wary of further yen selling by Japanese authorities.

The euro was down 0.9 percent at 107.28 yen, erasing much of the gains made during intervention. - Reuters

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