FOREX-Weak euro zone outlook knocks euro, more losses seen

Fri Nov 9, 2012 6:13pm IST

* Euro hits 2-month low vs dollar, 1-month low vs yen

* Concerns grows over weakness in euro zone 'core'

* German economy ministry sees growth slowing

* Investors concerned over timing of Spain bailout request

By Philip Baillie

LONDON, Nov 9 (Reuters) - The euro fell to a two-month low against the dollar on Friday and was seen vulnerable to further losses on weak euro zone growth prospects and uncertainty over debt problems in Greece and Spain.

The euro fell 0.3 percent to a low of $1.2706, its weakest since Sept. 7. It also lost 0.6 percent against the yen to a one-month low of 100.66 yen on the EBS trading platform.

"There has been a rather poisonous cocktail that is dragging the euro down with weak European numbers today and renewed fears of the euro zone crisis with Greece back on the agenda," said Arne Lohmann Rasmussen, head of FX strategy at Danske markets.

"We would not be surprised if we saw the euro drop to the 1.25 level within the next three to four weeks."

Traders said strong bids ahead of a reported options barrier at $1.2700 could limit euro losses in the near term. However, if it breaks below $1.27 it could target the 100-day moving average around $1.2637 and the Sept. 7 low of $1.26268.

Concern that the economic weakness in indebted southern European states was spreading to "core" euro zone countries hit the single currency.

Germany's Economy Ministry said growth was likely to slow in the fourth quarter and the first three months of 2013.

The French central bank said it expected the euro zone's second-largest economy to slip into recession towards the end of 2012 and French and Italian industrial production figures for September were weak.

Investors were wary too before a Greek parliament vote on Sunday on its 2013 budget. The budget must be passed to unlock a further tranche of international aid.

As the euro wilted, the dollar's index against a basket of currencies rose 0.2 percent to 80.939, close to a two-month high of 81.001 reached on Thursday.

Danske's Rasmussen said worries over the looming "fiscal cliff", which could trigger tax rises and spending cuts in the United States if unresolved, was likely to prompt investors to buy the safe-haven dollar.

U.S. fiscal worries weighed on the dollar against the yen, however. It fell to a three-week low of 79.18 yen. The yen is usually the most sought-after currency at times of financial stress and doubts about an economic recovery.

SPAIN UNCERTAINTY

Uncertainty over whether Spain will apply for financial aid also cast a shadow over the euro. Such a move would allow the European Central Bank to buy its bonds and lift the euro.

Spain has so far resisted asking for aid. The prospect of ECB support has driven its borrowing costs down and it has met its 2012 bond issuance target.

"We are looking at a game of chicken between Spanish Prime Minister Mariano Rajoy and the bond markets for looking at a bailout," said John Hardy, FX strategist at Saxo Bank.

European Central Bank President Mario Draghi said on Thursday the euro zone economy showed little sign of recovering before year-end, despite easing financial market conditions.

The Swedish crown weakened against the euro and the dollar as industrial output saw its largest fall for more than three years. Danske's Rasmussen said this raised expectations of a rate cut in December.

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