April 5, 2012 / 6:47 PM / 5 years ago

FOREX-Euro hits multiweek lows, breaks SNB's 1.20 franc floor

* Euro hits 3-week lows against dollar, 4 weeks versus yen
    * Euro zone debt concerns rise on rise in Spanish yields
    * SNB steps as euro dips under 1.20 francs floor


    By Julie Haviv	
    NEW YORK, April 5 (Reuters) - Fears about Spain's high debt
level pushed the euro down broadly on Thursday to its lowest
level against the dollar in three weeks and prompting the Swiss
National Bank to take action to curb the franc's strength.	
    The euro fell for a fourth straight day against the
greenback as a jump in Spain's borrowing costs made investors
nervous about the country's ability to meet budget targets that
could mark another escalation of the euro-zone debt crisis.
 	
    With the euro zone engulfed in a debt crisis, the European
Central Bank's policy should remain accommodative, with dovish
comments by ECB president Draghi on Wednesday affirming thzt
notion. That contrasts with the U.S. Federal Reserve, which this
week downplayed expectations of adding more stimulus.	
    As the U.S. economy improves, U.S. short term rates could
start rising before ones in the euro zone, eliminating one of
the key weaknesses for the dollar.	
    "Spain is not Greece and is a much bigger contributor to
GDP, so the jump in yields is a very valid concern right now,"
said Dan Dorrow, director of research at Faros Trading in
Stamford, Connecticut.	
    "The euro zone firewall set up is not big enough to save
Spain," he said. "If the ECB were the Fed right now they would
be embarking on quantitative easing or lowering rates, but the
ECB is more passive in its approach, which is dangerous, and I
think they are walking a tight rope."	
    Against the dollar, the euro was down 0.6 percent at
$1.3064, having hit a three-week low of $1.3033. It also hit its
lowest in four weeks against the yen at 106.86 yen
before recovering to trade at 107.54 yen, still down 0.7 
percent. 	
    In the options market, three-month risk reversals in the
euro/dollar showed a bias for euro puts, reaching a low of -2.30
vols on Thursday versus -1.90 vols the previous
session. It last traded at -2.10 vols.	
     The bias against the euro, however, has been improving
since early March when it reached a low of -2.81 vols. 	
    A negative risk reversal indicates the volatility of put
options is higher than the volatility of call options, with more
investors betting on a fall than a rise.	
    A U.S. government report on new jobless benefits added to
the dollar's allure against the euro. 	
    The U.S. outlook is increasingly contrasting with Europe
where separate reports showed German industrial output fell more
than expected in February and British factory output suffered
its biggest monthly fall in almost a year 
 	
    After holding interest rates at a record low of 1.0 percent
on Wednesday, ECB's Draghi said downside risks to the economic
outlook "prevailed" and dismissed talk of an exit strategy from
accommodative policy measures. 	
           	
    SNB BUYS	
    Broad euro selling led the euro-zone single currency to dip
below 1.20 Swiss francs for the first time since the SNB set
that level as a cap for the Swiss currency in September 2011 in
a bid to curb a sharp rise caused in part by investors fleeing
the euro.	
    The euro hit a low of 1.1992 francs, according to
Reuters data, before recovering to last trade at 1.2020. Traders
said the SNB was buying euros around 1.20. An SNB spokesman said
the bank would do all it could to defend the cap. 	
    Traders said the SNB's determination may make investors wary
of testing their resolve again, but renewed euro zone debt
worries may mean the central bank will have to step in again.	
    "If we continue to see Spanish yields pushing out, the euro
should broadly come lower, and I'm happy to stick with a short
position for now, looking to take profit near $1.3000," said
Jeremy Stretch, head of currency strategy at CIBC in London	
    "There's a realization that structurally the periphery of
Europe remains under extreme stress."	
    	
 
 	
    Traders reported thin market conditions ahead of the Easter
holiday and the U.S. March nonfarm payrolls report on Friday.  	
    The U.S. economy is expected to have added 203,000 jobs last
month after February's 227,000 increase.
   	
    Against the yen, the dollar last traded down 0.2 percent at 
82.34.

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