Euro to fall on contagion fear; U.S. jobs data eyed

By Wanfeng Zhou

NEW YORK (BestGrowthStock) – The euro should extend losses against the dollar in the near term after its worst week in over three months on fears Portugal and Spain will be next to need bailouts after Ireland.

Technical charts and option trading also suggest increasing bearishness on the euro. The euro slid to a two-month low at $1.32 on Friday and was down 3.5 percent this week, on pace for its biggest weekly percentage drop since mid-August.

Concerns over a deepening debt crisis in the euro zone and escalating tensions in the Korean peninsula could lift the safe-haven U.S. dollar. The greenback could get an added boost if a key U.S. jobs report next Friday beats expectations.

“The bigger question is will Spain and Portugal remain immune and I would look and say, ‘no’,” said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington.

“The situation in the euro zone will continue to deteriorate,” he said, adding the euro could drop “below $1.30 and perhaps as low as $1.25 by year-end.”

The premium investors demand to hold Irish and Spanish government bonds rather than German benchmark Bunds hit new euro lifetime highs on Friday. Portuguese bonds also underperformed after a report said the majority of euro zone states and the European Central Bank were urging Portugal to apply for a bailout.

European officials said reports Portugal was under pressure to seek a bailout were “absolutely false”. Spain on Friday ruled out that it needs help to manage its finances.

Nomura currency strategists Jens Nordvig and Charles St-Arnaud said the outlook on Spain, which accounts for 11.8 percent of euro zone economy, will be a primary driver of the euro in the coming weeks.

“In a scenario where Spanish spreads widen to Portugal’s current levels, we see the risk premium on the euro increasing from around 10 percent to above 20 percent, and this could see the euro trade all the way to 1.23 against the U.S. dollar,” they wrote to clients. “The big question is whether this is the central case.”

BEARISH ON EURO, KOREAN CONFLICT

On Friday, the euro last traded at $1.3239, down 0.9 percent on the day, after falling as low as $1.3200 on trading platform EBS. The euro hit a four-year low of $1.1876 in June in the wake of the Greek debt crisis.

Bearish momentum in the euro will likely continue after the currency breached several key support levels this week, including its August high at $1.3334 and the 61.8 percent retracement of its August to November rise at $1.3232.

Next support comes in around the 200-day moving average at $1.3131, followed by $1.3080, the 50 percent retracement of the euro’s June to November rally.

Ashraf Laidi, chief market strategist at CMC Markets in London, said a close below the important $1.3250/60 trendline support could see the euro/dollar slide toward $1.27.

In the options market, risk reversals have showed increasingly bearish sentiment on the euro, while analysts at Credit Suisse noted “significant buying of bearish euro structures against the dollar, yen and the Swiss franc.”

On Friday, one-month euro/dollar risk reversals traded at -2.3, with a bias toward euro puts, suggesting more investors are betting the euro will fall than rise. That was down from -1.6 on Monday. In mid-October, euro/dollar risk reversals traded near neutral levels at -0.55.

Investors will also closely watch developments in the Korean peninsula, which will likely benefit the dollar as safe-haven demand rises.

Analysts said the dollar should also benefit if U.S. housing and jobs data next week comes in stronger than expected, which would reinforce expectations the U.S. economy is outperforming that of Europe.

(Editing by Andrew Hay)

Euro to fall on contagion fear; U.S. jobs data eyed