FOREX-Euro slides to two-month low vs dollar after ECB

Thu Nov 8, 2012 11:20pm IST

* Euro hits two-month low versus dollar, five-week low vs sterling

* ECB keeps rates unchanged, says growth to remain weak

* U.S. fiscal worries underpin safe-haven flows into dollar

By Wanfeng Zhou

NEW YORK, Nov 8 (Reuters) - The euro fell to a two-month low against the dollar on Thursday after the European Central Bank held interest rates at a record low and said the euro zone economy showed little sign of recovering before year-end.

ECB President Mario Draghi, in a press conference after the bank's decision to hold rates steady at 0.75 percent, said the bank cannot do much more to help Greece with its debt burden and gave Spain none of the assurance it has sought that ECB bond buying will lower its borrowing costs.

Uncertainties about the euro zone's economic outlook, the ability of Greece to stay afloat and when Spain will request international aid have weighed on the euro in recent days. The currency has rallied nearly 4 percent against the dollar since the beginning of August.

"We do expect the euro to be on the weaker side. Since August, the euro has recovered fairly nicely, but we've lost that momentum now. I wouldn't really be surprised to see it get back into the $1.24-$1.25 area," said Tom Nakamura, a portfolio manager at Toronto-based AGF Investments, which oversees $42 billion.

The euro slid to a two-month low of $1.2716 on Reuters data, the weakest since Sept. 7, before recovering to $1.2745, down 0.2 percent on the day. Traders said option-related buying was noted ahead of $1.2700 barriers.

Analysts said Draghi's comments on growth left open the opportunity of an interest rate cut although he said policymakers have not discussed plans for next year.

"The European economy needs to be revived. If the ECB will not do it, who will? The euro will continue to weaken because there is no recovery in sight for Europe and the rest of the world continues to slip," said Joseph Trevisani, chief market strategist at WorldWide Markets in Woodcliff Lake, New Jersey.

German exports slid at their fastest pace since late last year, figures showed on Thursday, adding to evidence that the euro zone's debt crisis has begun to inflict a heavy toll on Europe's largest economy.

The dollar index, which measures its performance against a basket of major currencies, rose to a two-month high of 81.001 as investors trained their focus on the "fiscal cliff" that is threatening to push the U.S. economy into a recession next year. The index was last up 0.1 percent at 80.841.

Concerns about the U.S. fiscal situation has ironically prompted investors to seek safe haven in U.S. Treasuries, boosting the dollar.

About $600 billion in government spending cuts and higher taxes will kick in early next year, unless U.S. lawmakers take steps to reduce the deficit.

SPAIN AUCTION

Spain's bond yields rose after signs of weak demand at an auction of new five-year Spanish bonds raised a warning flag, even though the sale completed the country planned funding for 2012, allowing it to hold out a bit longer before requesting international aid.

A media report that said Spain is edging away from asking for aid this year also drove speculators - already positioned for further weakness - to sell the euro aggressively. Earlier this week, Prime Minister Mariano Rajoy said conditions over a potential bailout were still being studied.

Financial markets had been waiting for Madrid to ask for aid, a move seen as positive for Europe because it would activate the ECB's bond-buying program aimed at lowering borrowing costs for debt-laden euro zone economies.

The euro also hit a near four-week trough against the yen, and was last down 0.6 percent at 101.54 yen.

It also fell to a five-week low against sterling at 79.605 pence and was last changing hands down 0.2 percent at 79.76 pence. The Bank of England left interest rates and its asset purchase program unchanged.

The dollar slipped 0.4 percent to 79.65 yen, staying below a six-month high of 80.67 yen set on Reuters data last week.

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