April 5, 2012 / 12:21 PM / 6 years ago

FOREX-Weak euro drops below SNB's 1.20 franc floor

* Euro hits 3-week lows versus dollar and yen
    * Spanish yields rise after Wednesday's bond auction
    * SNB steps as euro dips under 1.20 francs floor

    By Jessica Mortimer	
    LONDON, April 5 (Reuters) - Worries about high debt levels
in Spain hurt the euro on Thursday, driving it to a three-week
low versus the dollar and prompting the Swiss National Bank to
step in as the franc broke through a ceilng set against the
common currency last year.	
    Spanish borrowing costs rose as investors became
increasingly nervous following a poor debt auction on Wednesday
about the country's ability to meet budget targets that could
mark another escalation of the euro zone debt crisis. 	
    Broad euro selling saw the single currency 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 appreciation caused in part by investors fleeing the
    The euro hit a low of 1.1990 francs on the EBS
trading platform before recovering, with traders saying the SNB
was seen buying euros around 1.20. An SNB spokesman said the
bank would do all it could to defend the cap. 	
    It recovered to last trade at 1.2015 francs. 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 has to step in again.	
    "Until now the market has been doing the SNB's work for it
if there was any dip towards the 1.2000 level, buying any dip as
they believed the downside to be limited because they assumed
the SNB would aggressively defend it," said Richard Wiltshire,
chief FX Broker at ETX Capital.	
    "If this mood ceases to prevail then market forces may
dictate they have to get involved again."	
    Against the dollar, the euro was down 0.5 percent at
$1.3076, having hit a three-week low of $1.3057. It also hit its
lowest in four weeks against the yen of 106.89 yen on
EBS trading platform.	
    The renewed rise in Spanish government bond yields followed
Wednesday's poorly received debt auction, with traders worrying
that the positive impact from the European Central Bank's two
low-interest, three-year funding extravaganzas may be coming to
a screeching halt.	
    "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.	
    "There's a realisation that structurally the periphery of
Europe remains under extreme stress."	
    Traders reported bids around $1.3050, while technical
analysts said Wednesday's close in the euro below its 55- and
100-day moving averages was a negative signal, with the focus
moving to last month's lows around $1.3000.  	
    After holding interest rates at a record low of 1.0 percent
on Wednesday, European Central Bank President Mario Draghi said
downside risks to the economic outlook "prevailed" and dismissed
talk of an exit strategy from accommodative policy measures. 	
    The dollar index, tracking the greenback's
performance against major currencies, hit a three-week high of
80.079, boosted by demand for perceived safer assets.  	
    Traders reported thin market conditions ahead of the Easter
holidays and all-important U.S. jobs data due on Friday.  	
    The U.S. economy is expected to have added 203,000 jobs last
month, after February's non-farm payrolls rose 227,000.

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