FOREX-Euro hugs 2-week low as Italy hit by political storm

Mon Dec 10, 2012 7:52am IST

* Monti's surprise offer to quit raises uncertainty over pro-euro stance

* Euro weighed by bleak German economic outlook, ECB rate cut expectations

* Strong US job data supports dollar

* Dollar/yen may have downside after failed chart break

* Canadian dollar hits 7-week high on data, foreign takeover approval

By Hideyuki Sano

TOKYO, Dec 10 (Reuters) - The euro flirted with two-week lows against the dollar on Monday after Italian Prime Minister Mario Monti offered to resign, raising political uncertainty over who will lead the euro zone's third-biggest economy.

The single currency was also undermined by the prospect of a recession in Germany and expectations of a future rate cut by the European Central Bank.

"If Monti's pro-euro stance is to back off, that should raise concerns about the euro," said Junya Tanase, chief currency strategist at JPMorgan Chase in Tokyo.

The euro fell as much as about 0.3 percent to $1.2880 near a two-week trough of $1.2876 set Friday. It last stood at $1.2908, down about 0.2 percent from late U.S. levels, with focus now on the Italian bond market reaction to the news.

Against the British pound, the euro also hit a three-week low of 79.865 pence.

Monti's surprise announcement at the weekend came a few days after former prime minister Silvio Berlusconi abruptly withdrew support for Monti's technocrat government, formed over a year ago in an effort to restore Italy's credibility with investors.

An election is expected to be brought forward to February, where, at the moment, the pro-European centre-left Democratic Party is seen as having a strong advantage over an anti-Monti front from Berlusconi and a new anti-establishment party, which comes second in polls.

The euro also came under pressure after Germany's central bank on Friday warned the euro zone's biggest economy could soon enter recession.

Comments from a European Central Bank policymaker on Friday that an interest rate cut was possible next year if the euro zone economy does not pick up also weighed on the common currency.

The bleak view contrasted with strong U.S. job data published on Friday, which showed hiring by U.S. firms rose to 146,000 in November from 138,000 in October, defying predictions about a blow from superstorm Sandy.

The unemployment rate also fell to a near four-year low of 7.7 percent.

The U.S. dollar index rose 0.2 percent to 80.45, near two-week high of 80.658 hit just after the release of the payroll data on Friday.

Still, a big drop in U.S. consumer confidence took some shine off the dollar, and the dollar's upside is also capped in the lead-up to this week's Federal Reserve policy meeting.

Many economists think the Fed will announce on Wednesday monthly bond purchases of $45 billion, signalling it will continue to pump money into the U.S. economy during 2013 in a bid to bring down unemployment.

"Despite a drop in the unemployment rate, we expect the Fed to convert the expiring Operation Twist programme into an outright purchase programme, with a purchase distribution similar to the current program," Barclays Capital analysts wrote in a note.

Also not helping the dollar, there are few signs that Washington policymakers are moving closer to prevent automatic tax hikes and spending cuts set to take hold next year, which analysts have warned could see the U.S. economy swing back into a recession.

President Barack Obama met with Republican Speaker of the House of Representatives John Boehner on Sunday to discuss ways to avoid the 'fiscal cliff', but a resolution remained elusive.

Against the yen, the dollar was steady at 82.48 yen but its failure on Friday to break above last month's high of 82.84 yen after the strong job data could suggest the U.S. currency is susceptible to a fall in the near term, some analysts said.

"The dollar did not rise despite rise in dollar bond yields. With yen short positions already at a high level, the dollar could fall quite fast," said JPMorgan's Tanase.

U.S. regulator data showed speculators' net yen short positions rose to its highest level since mid-2007.

The Canadian dollar hit a seven-week high against the U.S dollar, which fell to as low as C$0.9865, as the Canadian unit extended its gains following strong Canadian job data and the government's approval of takeover of energy company Nexen by China's oil giant CNOOC.

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