April 5, 2012 / 3:52 AM / 5 years ago

Euro hits multiweek lows, breaks 1.20 francs floor

One dollar and 10 cents in Australian currency sit atop a U.S. one dollar note in this photo illustration taken in Sydney July 27, 2011.Tim Wimborne

NEW YORK (Reuters) - Worries about Spain's high debts pushed the euro on Thursday to multiweek lows against the dollar and the yen and prompted the Swiss National Bank to take action to curb the franc's strength against the euro zone single currency.

The euro fell for a fourth 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. <GVD/EUR>

Fears about Spain will likely keep the European Central Bank's policy in an accommodative mode, with dovish comments by ECB president Draghi on Wednesday affirming that notion. That contrasts with the U.S. Federal Reserve, which this week downplayed expectations of adding more monetary 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 tightrope."

Against the dollar, the euro was last 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 107.58 yen, still down 0.7 percent.

The EURUSD range has been roughly $1.30-$1.35 for 10 weeks and history suggests that a move following a break of such a range will be either to the downside to $1.20 or the upside to $1.45, according to Greg Anderson, G10 strategist at CitiFX, a division of Citigroup in New York.

"The implication for the present moment is that if we see $1.30 break first, be it next week or any time over the next couple of months, then we should consider it likely that the move extend to $1.20," he said.

In the options market, the cost of protection against a fall in the euro edged higher, suggesting a bit of anxiety about Spain's debt.

Three-month risk reversals in the euro/dollar showed a bias for euro puts and last traded at -2.00 vols on Thursday versus -1.90 vols the previous session. The bias against the euro, however, has been improving since early March when it reached an extreme level of -2.81 vols.

Euro/yen three-month risk reversals also showed a bias for puts against the euro and last traded at -3.45 vols, up from -3.09 vols on Wednesday.

The U.S. outlook is increasingly contrasting with Europe, several reports reflected on Wednesday.

SNB BUYS

Broad euro selling led the euro 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 1.2014. 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.

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Fed, ECB stimulus vs global stocks: r.reuters.com/rec57s

Spain economy in graphics: link.reuters.com/quf25s

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Against the yen, the dollar last traded down 0.1 percent at 82.38 yen.

Traders reported thin market conditions ahead of Good Friday and the Easter holiday weekend, but the U.S. March nonfarm payrolls report on Friday could sway sentiment.

The U.S. economy is expected to have added 203,000 jobs last month after February's 227,000 increase.

"A strong nonfarm payrolls report would be the dollar's ticket to push higher, though the full market reaction may have to wait until early next week when players return from the long holiday weekend," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

"A below-forecast employment report would likely see the buck succumb to profit-taking and lead others to reconsider the outlook for Fed policy," he said.

(This version of the story corrects the currency in 12th paragraph to euro from yen)

Additional reporting by Nick Olivari; Editing by James Dalgleish

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