Euro punished, hits 2-1/2-month low vs U.S. dollar

By Julie Haviv

NEW YORK (BestGrowthStock) – The euro slumped to 2-1/2-month lows against the U.S. dollar on Tuesday and more losses are likely as fears about euro zone sovereign debt prompt widespread risk aversion.

A financial rescue deal for Ireland failed to contain contagion fears as the euro fell (Read more about the trembling euro. ) below the critical $1.30 level and investors took out many options barriers on the way. The next key figure to watch, traders said, is $1.2794, the 61.8 percent retracement of the June to November rally.

The euro was down nearly 7 percent on the month, on track for its worst monthly performance since May when Greece received a 110-billion-euro bailout.

In tandem with euro weakness, the premiums investors demand to hold Spanish and Italian sovereign bonds over German debt jumped to lifetime highs while yields on Portuguese, Irish and Belgian bonds also widened.

Camilla Sutton, chief currency strategist at Scotia Capital in Toronto, said downside pressure on the euro remains well in place after going below the $1.30 level in European trading.

Should support at the pivotal $1.30 sustainably give way, $1.2920 and then the August-September support in the $1.2600 to $1.2650 range present the next logical targets to the downside, she wrote.

“Europe is making some very bad decisions with respect to the whole region and the currency,” said Peter Schiff, chief executive officer at Euro Pacific Capital, an asset management firm overseeing customer accounts of about $3 billion.

“They should not have bailed out Greece and Ireland, they should have allowed them to restructure their debt, and allowed their bondholders to take losses. Countries would now want to go into debt because they want those bailouts and the countries that are responsible get stuck with the bill,” said Connecticut-based Schiff.

Given sharply negative sentiment on euro zone assets, the European Central Bank should take a more active hand in managing the crisis, analysts said. Talk of an ECB quantitative easing would not be surprising, said Boris Schlossberg, director of FX research at GFT in New York.

The ECB’s meeting this Thursday is therefore crucial as investors will be looking for comments on how the bank could help address growing jitters in the credit and currency market. It is also widely expected to keep rates on hold and sources say it could extend banks’ access to unlimited three-month funds beyond January.

KEY TECHNICAL LEVELS

The euro fell (Read more about the trembling euro. ) to $1.2969 on EBS, its lowest since September 15, before recovering to $1.3008, still down 0.7 percent. Some traders said there is minor support at $1.2920, the September 6 high. That level preceded a steep rally in the euro that took it all the way to that early November high at $1.4283.

A slew of strong U.S. economic data lifted risk sentiment a bit from midmorning, drawing bids away from the safe-haven dollar and giving the heavily-battered euro some reprieve.

Some traders said $1.3040 could act as resistance on any intraday rebound.

Other euro-zone-linked assets such as euro exchange-traded funds also fared poorly on Tuesday. The CurrencyShares Euro Trust traded on the Chicago Board Options Exchange was down 0.86 percent at $129.60 after hitting a 2-1/2-month low at $129.23. This ETF holds euro on-demand deposits in euro-denominated bank accounts.

Traders said the ease with which the euro had broken key levels in recent days reflected the extent of negative sentiment toward the currency, which has lost roughly 9 percent against the dollar since its peak this month.

Euro/dollar implied volatilities spiked on Tuesday to a peak of 15.55 percent, the highest since at least June, suggesting nervousness about the euro zone currency.

The one-month 25-delta risk reversals, a gauge of currency sentiment, traded as low as -2.85 vols for euro puts versus a close of -2.73 on Monday.

Further reflecting the euro’s negative bias, the latest positioning data from the Commodity Futures Trading Commission showed speculators going net short on the euro for the first time since September 14.

The euro zone single currency slid to 1.2934 Swiss francs, 108.33 yen, and 83.495 pence against sterling, all more than 10-week lows.

With the spotlight on the euro, the dollar continued to gain, hitting a more than two-month high at 81.444 against a currency basket (.DXY: ), lifted by safe-haven flows and recent evidence of an improving U.S. economy. It last traded up 0.42 percent at 81.187.

(Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Andrew Hay)

Euro punished, hits 2-1/2-month low vs U.S. dollar