SINGAPORE: The euro hovered near a four-month low on Wednesday after Cyprus rejected terms of a proposed bailout, creating uncertainty about the country's financial future and reviving fears about the stability of the euro zone.
Cyprus overwhelmingly rejected a proposed levy on bank deposits as a condition for a European bailout on Tuesday, throwing international efforts to rescue the latest casualty of the euro zone debt crisis into disarray.
The general assumption in markets, however, is that the European Union, as so often before, will hash out a last minute deal that keeps Cyprus in the single currency.
"European officials have repeatedly come out with last minute plans to save the day, and I think down at these levels, that's a major reason why the market isn't chasing it aggressively," said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore, referring to the euro's moves against the dollar.
"But the longer that Europe doesn't come up with a plan B, the greater the risk of a major slide in the euro," he added.
The euro held steady at around $1.2875, holding right near its 200-day moving average. On Tuesday the euro had dropped below that support and touched a four-month low of $1.28435 on trading platform EBS.
Further losses were prevented only after the European Central Bank said it was committed to providing liquidity to Cypriot banks within certain limits.
"On technical charts it seems as if the euro has made a downside break," said a trader for a Japanese bank in Singapore.
"Things could get scary if speculation grows about the potential for spillover effects," the trader said, referring to the turmoil in Cyprus.
The euro's lowest point on Tuesday marked a decline of more than 6 percent from its early February peak of $1.3711.
One factor that could support the euro in the very near term is market positioning, said Jeffrey Halley, a trader for Saxo Capital Markets in Singapore.
"We think the danger is actually up in Asia today as Europe, the USA, the rest of the world, have clearly gone home short," he said, adding that stop-loss euro buying orders were accumulating on the top side.
The yen edged higher in thin market conditions, with Japanese financial markets closed for a national holiday.
The euro slipped 0.3 percent to 122.27 yen, clinging above support at its 55-day moving average that now comes in at about 121.99 yen.
The dollar fell 0.2 percent to 94.97 yen.
The market is wary of any comments from Haruhiko Kuroda, who becomes governor of the Bank of Japan on Wednesday.
Expectations are high that Kuroda will quickly embark on a much more aggressive monetary policy to fight deflation, perhaps even before the BOJ's next scheduled policy meeting in early April.
Sterling edged up 0.1 percent to $1.5097 ahead of the release of the UK annual budget later on Wednesday.
Investors are wary that UK finance minister George Osborne could announce a change in the Bank of England's (BoE) remit to allow more leeway on inflation targeting, paving the way for further monetary easing.
The focus is also turning to the end of a two-day US Federal Reserve policy meeting on Wednesday. The Fed looks set to keep buying $85 billion a month in mortgage and Treasury bonds in an effort to encourage investment and bolster a weak economic recovery.
As ever, the market will be hyper sensitive to any hint on when the Fed might consider slowing its asset buying plans.
The Fed is due to provide an update to its economic forecasts on Wednesday, and Fed Chairman Ben Bernanke is due to hold a news conference.
"The tone of Bernanke's press conference is likely to be similar to his recent speeches -- encouraged by the improvement in recent data but cautious about the outlook and content that the effect of the ongoing asset purchase program continues to be a net positive for the economy, despite risks related to financial market stability," wrote analysts at Barclays.
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