Categorized | Forex

FOREX-Euro pauses descent, but vulnerable to fresh falls

FOREX-Euro pauses descent, but vulnerable to fresh falls

* Euro holds above a 4-month low vs dollar

* Greek banks face funding needs, adding to pressure

* Spanish bond auction will be in focus

By Anirban Nag

LONDON, May 17 (Reuters) – The euro held above a four-month low on Thursday, taking a breather from a sharp sell-off, although gains are likely to be checked by worries about the solvency of some Greek banks that are adding to fears the country may exit the euro zone.

The common currency was trading at $1.2724, up 0.1 percent on the day, though not far from a four-month low at $1.2681 hit the day before, with stops cited below $1.2680. The euro has already shed 3.9 percent in May, coming close to its 2012 trough of $1.2624 reached in mid-January.

Contagion fears and jitters over political turmoil in Athens, where politicians rejecting harsh austerity measures are likely to win June 17 elections, have sent riskier assets such as the Australian dollar sharply lower over the past three weeks.

Dealing another blow to fragile risk appetite, the European Central Bank stopped providing liquidity to some Greek banks as they are severely undercapitalised, moving them to an emergency liquidity assistance programme.

“The market is pricing in a lot of bad news and weaker euro zone structural issues, so there is a chance that the euro will be taking a breather,” said Geoffrey Yu, currency strategist at UBS. “Also, the Fed is split and further QE is still being considered, so that should offer some support to the euro.”

Minutes of the Fed’s most recent policy-setting meeting, released on Wednesday showed several Federal Reserve policymakers last month thought the U.S. central bank might need to do more to support the economy if the recovery stumbles.

That is likely to restrain the greenback which has been one of the biggest beneficiaries of safe-haven flows out of the euro zone. Further quantitative easing by the Fed is considered negative for the dollar as it pushes down yields on U.S. Treasuries.

BEARISH GRIP

Investors and speculators have built huge bearish positions against the euro since the start of the month after an inconclusive Greek election left the country on the road to bankruptcy and a possible chaotic exit from the euro zone.

A Greek departure from the euro area would have a potentially damaging knock-on effect on other ailing economies such as Italy and Spain, whose bond yields have shot back towards the crucial 6 percent mark this week.

Spain will auction 1.5 to 2.5 billion euros of 2015 and 2016 bonds later in the day and comes amid mounting concerns about the country’s banking sector.

“We maintain our strategy of looking to sell euro/dollar rebounds,” Morgan Stanley strategists said in a note. “In Europe the focus has returned to the banking sector, where deposit outflows are gaining attention.”

The bank targets the euro to drop to $1.25 and recommends investors to initiate bearish positions on the currency’s rebound to $1.2780.

Separately, data released on Thursday confirmed the Spanish economy contracted 0.4 percent in the first quarter, having shrunk by the same pace in the fourth quarter, and putting the country firmly in a recession.

Traders’ skittishness towards the euro was visible in the options markets, where one-month euro/dollar implied volatility was last at 10.65 percent, not far from the 2-1/2-month high hit on Wednesday at 11.30 percent.

Against the yen, the single currency was flat at 102.20 yen, not far from a three-month low of 101.904 yen struck on Wednesday. The euro has shed nearly 7.5 percent since the end of March.

With the euro recouping some of its heavy losses, the dollar index – a gauge of its performance against major currencies – eased from a four-month high of 81.573 to last trade at 81.387. The dollar was broadly steady against the yen at 80.32, not far from a two-week high of 80.56 hit on Wednesday.

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