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Euro rises after Cyprus bank deal

Friday, March 22 12:12:37

The euro rose today after Cyprus agreed to spin off Greek units of debt-ridden Cypriot banks, removing one source of uncertainty as the island scrambled to avoid financial meltdown.

The Cypriot presidency said the deal had been settled with favourable terms for Cyprus.

The euro rose 0.4 percent on the day to $1.2949, with traders citing buying by a UK bank. It hit a four-month low of $1.28435 earlier in the week after Cyprus rejected the terms of a proposed European Union bailout.

Despite its gains, strategists said the single currency could struggle to break above $1.30 and would remain vulnerable to developments in Cyprus and the risk of contagion to other euro zone countries.

The EU has given Cyprus until Monday to raise the 5.8 billion euros its needs to secure a 10 billion euro international lifeline. Without a deal, the European Central Bank will cut funds to Cypriot banks. This could see it become the first euro zone member state to exit the currency bloc.

Nonetheless, moves in the euro did not suggest investors were panicking.

"There's a lot of competing noise from the headlines. The market has been relatively constrained but if we were talking about a bigger country it would be a lot more volatile," said Simon Smith, currency economist at FxPro.

"The euro has priced in a fair amount of bad news already and there's still some underlying hope they will stitch something together. But even if we do see Cyprus remain within the euro zone it's not going to be a massive positive for the euro."

Smith said he expected the euro to grind lower towards $1.24-$1.25 over the next three months.

Traders expect the euro increasingly to reflect the emerging risks to the euro zone. While the European Central Bank has tools in place to prevent contagion, an exit by Cyprus would still sour sentiment towards European assets. Reuters