FOREX-Euro to fall on contagion fear; US jobs data eyed

* Euro/dollar may decline towards $1.25 by year-end

* Euro zone debt crisis, Korean conflict to lift US dollar

* U.S. nonfarm payrolls report also in focus

(Adds comment, updates prices, changes byline)

By Wanfeng Zhou

NEW YORK, Nov 26 (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. For details, see [ID:nLDE6AP08Y]

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.”


On Friday, the euro last traded at $1.3239 (EUR=EBS: ), 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 towards $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 (EUR1MRR=GFI: ), 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)

FOREX-Euro to fall on contagion fear; US jobs data eyed