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Euro falls on Cyprus Troika deal

Tuesday, March 19 07:23:57

The euro hovered around three-month lows versus the dollar today on news that Cyprus's parliament was unlikely to approve a controversial bailout plan that has sparked fears about the stability of euro zone financial institutions.

The common currency dropped 0.1 percent beneath late U.S. levels to trade at $1.2948 after government spokesman Christos Stylianides told state radio that the plan needed to secure a financial rescue was unlikely to be approved, and that EU partners should offer some additional help.

However, the euro held above the three-month low of $1.2882 hit on Monday after recouping some of its losses in late U.S. trade, as euro zone ministers urged Cyprus to let smaller savers escape a proposed levy on bank deposits.

"I don't think investors care too much about the details of the deal, they are just concerned about whether it passes or not," said Kyosuke Suzuki, director of foreign exchange at Societe Generale.

Earlier on Tuesday, Asian investors had been relieved by the apparent lack of fallout on other euro zone countries, as an uptick in Spanish and Italian debt yields appeared to be contained.

"Looking at European and U.S. markets yesterday, the injury seems to be shallow. But it would be premature to say it will heal in just two days," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

The common currency now faces an uphill battle to close the yawning gap to Friday's close of $1.3076, although there is strong support seen at its 200-day moving average of $1.2875.

Against sterling, the euro wallowed near a five-week low of 85.34 pence hit on Monday to change hands at 85.73 on Tuesday.

"If the plan is voted down, there will surely be fresh selling in the euro," said Tohru Sasaki, the head of Japan rates and FX research at JPMorgan Chase Bank.

Sasaki also noted that euro looks vulnerable as its bounce overnight was smaller than its rebound after the fall triggered by a Greek election last May, when investors were shocked by the ruling coalition failing to win a majority.

"On Monday after the Greek election, the euro almost fully recovered from a 1 percent loss in Asia. But that turned out to be a high for many months to come, as the euro kept falling in the next two months and a half," he said.

As Nicosia extends its bank holiday until Thursday to avert panic, market players pondered whether savers in larger European countries would get nervous and withdraw funds, although there was no immediate sign of that on Monday.

Analysts at Barclays say they see limited risk of contagion to other countries.

"We consider that the scope of potential contagion to other peripheral countries in terms of deposit outflows and sovereign debt is considerably more limited than if such a decision would have been taken in previous programmes. Specifically, we consider the likelihood of a bank run in other periphery countries to be limited, including in Greece," they wrote.

The radical move on deposits had limited impact on Spanish and Italian debt on Monday. Their yield rose but stayed well within their recent ranges.

Commodity currencies, which took a hit in tandem with the euro initially, have recouped most of their losses, with Australian dollar trading at $1.0381, not far from a five-week high of $1.0415 hit last week.

The currency of resource-rich Australia is in focus as a new leadership takes charge in China, its biggest export market, said Michiyoshi Kato, senior vice president of forex sales at Mizuho Corporate Bank in Tokyo.

On Tuesday, the Australian dollar bought 99.12 yen , inching up from Monday's low of 97.69 against the Japanese currency, which declined across the board as sour risk sentiment on the back of the Cyprus shock softened somewhat.

"Whether the Aussie-yen can break through 100 depends on whether the new leaders can actually fire up the economy with no manipulation. That would get investors snapping up the Aussie," he said.

The dollar rose 0.4 percent on the day to 95.53 yen as investors covered their short bets on the greenback.

"If the dollar-yen manages to break above the top of its 93-96 yen range then it could sail pretty easily to 98. If you look at the corporate price index on a purchasing price parity basis then 97.5 looks like a buffer," said Kato of Mizuho Corporate Bank.

"Of course, if Cyprus blows up, risk sentiment would spike, meaning it might be difficult for it to get there." ( C) Reuters