FOREX-Euro sinks as political worries renew debt crisis concerns

Tue Feb 5, 2013 3:04am IST

* Euro investors cautious before ECB meeting
    * Dollar rises to 2-1/2-year high against yen
    * Expectations of more easing keep pressure on yen


    By Julie Haviv
    NEW YORK, Feb 4 (Reuters) - The euro tumbled from recent
highs against the dollar and yen on Monday as political
uncertainty in Spain and Italy renewed fears about the region's
debt crisis just days before a European Central Bank meeting
that could sway sentiment. 
    The euro, which hit its loftiest level against the dollar
since late 2011 on Friday, was also stung by European data that
drove a reminder that the euro zone's economic recovery is far
from solidified, despite recent evidence that the worst of the
region's recession may be behind it.
    Spain reported a rise in the number of people out of work on
Monday, and a euro zone investor sentiment index rose less than
expected.
    Spanish 10-year bond yields climbed to
six-week highs after Prime Minister Mariano Rajoy faced calls to
resign over a corruption scandal involving allegations in the
media that he received payments from a slush fund. Rajoy denies
any wrongdoing. 
    Adding to euro bearishness, news on alleged misconduct
involving an Italian bank indicated the scandal would likely
widen three weeks before a national election. Polls showing
Italian former Prime Minister Silvio Berlusconi regaining ground
before elections due this month added to investor concerns.
  
    "The political uncertainties surrounding the region may
further dampen the appeal of the single currency as the
governments operating under the single currency struggle to get
their house in order," said David Song, currency analyst at
DailyFX in New York. 
    Italy and Spain are the euro zone's third- and
fourth-largest economies, respectively. German Chancellor Angela
Merkel told Spain's Rajoy she had full confidence in his
government's ability to push through reforms needed to overcome
his country's economic crisis. 
    The euro last traded down 0.9 percent at $1.3514 
after hitting a session low of $1.3503, the lowest since Jan.
30. The euro reached $1.3711 on Friday, a level unseen since
late 2011. 
    Against the yen, the euro was last down 1.7 percent at
124.64 yen, off a 33-month high of 126.96 yen struck
last week. 
    The underlying euro zone economic performance remains weak,
which does not naturally lend itself to a sizeable build-up in
euro long positions, according to Nick Bennenbroek, head of
currency strategy at Wells Fargo in New York.
    "As a result we still expect the euro to soften over time,
although it will probably take a relapse in the economic data or
a return to dovish central bank rhetoric for such a decline to
occur," he said.  
    "We see the euro as little changed at $1.35 in three months,
and gradually sliding to $1.28 in 12 months," he said. "As a
result, we still view the euro's current levels as a selling
opportunity."
    Nevertheless, the euro remains up 2.4 percent against the
dollar so far this year, and it could continue to climb should
the European Central Bank express no concern about the
currency's recent gains at a news conference after its interest
rate decision on Thursday.
    
 
 

    Monetary stimulus or balance sheet expansion usually hurts a
currency because it increases its supply.    
    "Once the ECB fails to cut rates on Thursday, which is our
view, the euro will be free to move higher again, but with the
uncertainty surrounding the meeting the euro will likely weaken
slightly or trade sideways," said Adam Myers, senior FX
strategist at Credit Agricole in London.    
    
    YEN WEAKNESS
    Against the yen, the dollar touched a 2-1/2-year high of
93.18 yen, but last traded down 0.5 percent on the day at
92.28 yen, according to Reuters data. 
    "The yen will remain weak, though it will likely not be sold
at the momentum seen last week," said Myers, who added that 
investors would be looking to buy the euro and dollar against
the yen on dips.
    Sentiment toward the yen is negative as the BoJ is expected
to remain under pressure to ease monetary policy aggressively.
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