FOREX-Euro hits two-month low as contagion fears rule

* Euro falls below $1.3200 to lowest in two months

* Euro/dlr vols show bias towards downside

* Lukewarm response to Italian debt auction

(Adds quote, updates prices, adds Italian debt auction)

By Anirban Nag

LONDON, Nov 29 (BestGrowthStock) – The euro fell (Read more about the trembling euro. ) to two-month lows
against the dollar on Monday as investors looked past a rescue
package for Ireland to debt problems in other peripheral euro
zone economies and sold the currency on any bounce.

European Union finance ministers endorsed an 85 billion euro
rescue package for Dublin and approved outlines of a permanent
crisis-resolution system which could make private bondholders
share the burden of restructuring sovereign debt after 2013.
[ID:nLDE6AR0MC]

Sentiment remained fragile with a sale of Italian bonds
meeting lukewarm demand and highlighting investors’ unease
towards euro zone debt and the risk of contagion.[ID:nTAR001551]

A key question is whether the EU has done enough to stop the
crisis spreading to euro zone members such as Portugal and Spain
— problem left unresolved after Greece was bailed out in May.

“The euro remains a sell on rallies and any relief is
temporary,” said Ankita Dudani, G-10 currency strategist at RBS
Global Banking. “Ireland is taken care of but now the question
is whether Portugal needs help this year or the first thing next
year. And then you have Spain.”

Many traders think the European Financial Stability
Facility, a joint EU-IMF fund created in May, may not have
enough funds to support Spain if it needs help. [ID:nLDE6AR09R]

The euro was down 0.56 percent at $1.3172 (EUR=: ), having
fallen to $1.3166, its lowest since Sept. 21. It fell through
its 100-day moving average on Friday, a bearish signal, and the
next target is its 200-day moving average currently at $1.3129.

Euro/dollar implied volatilities extended a recent ascent,
reflecting nervousness about the single currency. One-month vols
(EUR1MO=: ) rose to 14.55 percent from 13.60 on Friday, while
risk-reversals increasingly bid for the downside. The one-month
25-delta (EUR1MRR=ICAP: ) was trading around 2.0 for euro puts
versus 1.85 on Friday.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Euro zone crisis timeline: http://link.reuters.com/nyx95q Multimedia coverage: http://r.reuters.com/hus75h Graphic on sovereign debt woes: http://r.reuters.com/zem66q ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

IRELAND TO IBERIA

Ireland said the emergency loans would run for an average of
7.5 years [ID:nWEA2085], with an interest rate of around 6
percent. Many analysts say markets are still likely to turn on
Portugal and Spain, seen as the euro zone’s next weakest links.

“It is going to be difficult to ringfence Ireland,” said Tom
Levinson, FX strategist at ING. “The euro will continue to
struggle in a week when we can expect some decent U.S. data.”

Another source of uncertainty is a lack of details on a
Franco-German proposal to make private bondholders share the
burden of losses on sovereign debt restructuring.

“The difficulty for the market is to allow itself the luxury
of letting these developments get traction in a currency market
where buying the euro is still akin to catching the falling
knife,” Daragh Maher, deputy head of global foreign exchange
research at CIB wrote.

Analysts said the market would be on the lookout for whether
ECB policymakers, meeting on Thursday, would go ahead and remove
some of the emergency measures put in place earlier this year.

While some analysts say the Irish package will reduce Irish
banks’ need for ECB funding, RBS’s Dudani said euro zone banks
were still grappling with funding problems and the emergency
measures were needed.

The euro’s losses helped the dollar index (Read more about the global trade. ) (.DXY: ) to its
highest in two months. It rose to as high 80.653, up 0.3 percent
for the day. The dollar which briefly hit a two-month high of
84.20 yen (JPY=: ). The pair was last hovering near its 100-day
moving average at 84.06, flat on the day.

FOREX-Euro hits two-month low as contagion fears rule