* Euro falls on political worries, Spain data
* Euro investors cautious before ECB meeting
* Dollar rises to fresh 2-1/2-year high against yen
* Expectations of more easing keep pressure on yen
By Julie Haviv
NEW YORK, Feb 4 The euro slumped from recent
highs against the dollar and yen on Monday as political
uncertainty in Spain and Italy renewed concerns about the
region's debt crisis just days before a European Central Bank
After rising for four straight days against the dollar and
hitting its loftiest level since late 2011 on Friday, the euro
succumbed to selling pressure, partly stemming from weak Spanish
unemployment data and a smaller-than-expected improvement in a
euro zone investor sentiment index.
The data served as a reminder that despite recent reports
showing the worst of the euro zone's recession may be behind it,
its recovery is far from being solidified.
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
Further adding to euro bearishness was news of a probe of
alleged misconduct involving an Italian bank that was expected
to widen three weeks before a national election. Polls showing
Italy's former prime minister, Silvio Berlusconi, regaining
ground before elections due this month added to investor
Italy and Spain are the euro zone's third- and
fourth-largest economies, receptively. 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 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.
The euro last traded down 0.8 percent at $1.3534
after hitting a session low of $1.3521, the lowest since Jan.
30. The euro had risen to $1.3711 on Friday, a level unseen
since late 2011.
Against the yen, the euro was last down 1.1 percent at
125.34 yen, off a 33-month high of 126.96 yen struck
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 twelve months," he said. "As a
result, we still view the euro's current levels as a selling
Nevertheless, the euro remains up 2.6 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 as 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.
The dollar touched a fresh 2-1/2-year high of 93.18 yen, but
last traded down 0.3 percent on the day at 92.48 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 towards the yen is negative as the BOJ is expected
to remain under pressure to ease monetary policy aggressively.