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Euro rally pauses on political woes

Monday, February 04 14:26:10

The euro slipped from multi-month highs against the yen and dollar today as most investors bet recent gains had gone too far, too fast ahead of a European Central Bank meeting this week and due to political uncertainty in Spain and Italy.

Weak Spanish unemployment data and a smaller-than-expected improvement in a euro zone investor sentiment index added to the drag on the common currency.

Spanish bond yields rose sharply on news Spain's prime minister Mariano Rajoy was facing increasing calls to resign on corruption charges. Polls showing Italy's former prime minister Silvio Berlusconi regaining ground before elections later this month added to investor concerns.

"The prospect of Rajoy's resignation has roiled the markets as any fresh political instability in (the) euro zone's most important periphery economy could undermine the sense of investor confidence and send Spanish yields higher, making it much more difficult for the government to implement its austerity measures," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.

The euro traded at $1.3571, down 0.5 percent on the day, having hit a session low of $1.3547. It fell past stop loss orders below $1.3570 with more stops cited below $1.3550.

But the euro's dip may prove temporary, strategists said, and it could resume its move up if the ECB expressed no concern about the currency's recent gains at a news conference after its interest rate decision on Thursday.

The euro had risen to $1.3711 on Friday, a level unseen since late 2011. The euro remains up 2.7 percent for the year.

Against the yen, the euro was down 0.7 percent at 125.88 yen , off a 33-month high of 126.96 yen struck last week. (C ) Reuters