The euro slipped to a three-week low against the dollar on Monday, hit by reports that rescue plans for ailing lender WestLB were under threat, and with eurozone peripheral debt concerns keeping investors on edge. Aid for WestLB hangs in the balance, a source told Reuters on Monday, as the bank struggles to come up with a rescue deal ahead of presenting a restructuring plan to the European Commission.
"The WestLB news doesn't provide a great deal of optimism to the euro at the start of the week," said Jeremy Stretch, currency strategist at CIBC. "Structural negatives in the eurozone haven't gone away, and some of those risks are due to the banking sector. WestLB's problems are a reflection of that."
The euro slipped to $1.3447 with selling coming largely from eastern-Europe in the aftermath of the news, hitting its weakest since late January. The move triggered stop-losses on the break of $1.3500, taking the euro below support at $1.3483, the 38.2 percent retracement of its rally from January to February. It was also trading back below its 100-day moving average which comes in at $1.3541.
A 0.3 percent quarterly contraction in the Portuguese economy at the end of 2010, and a slight monthly fall in eurozone industrial production in December kept euro sentiment sluggish, although the separate figures were largely in line with forecasts. Spanish bond auctions will be a focus for eurozone investors on Thursday, while investors await details of a European debt rescue fund next month. "Concerns about a European debt rescue plan will remain in place until March, and that is definitely a risk for the euro, particularly when you consider the peak redemption for Portuguese and Spanish bond redemptions in Q1," said Sven Schubert, currency strategist at Credit Suisse in Zurich.
President Barack Obama proposed a budget on Monday that would cut the US deficit by $1.1 trillion over 10 years, setting the stage for a bitter fight with Republicans who vow even tougher spending controls. Two thirds of Obama's deficit savings come from spending cuts and expected reductions in interest payments as the deficit declines. The rest comes from higher revenue, in part as provisions in a December pact on payroll taxes and jobless aid expire, and also as stronger growth lifts tax revenue.
Selling in the euro helped to boost the dollar broadly on the day, pushing it up around 0.4 percent on the day against a currency basket to 78.781, trading above its 100-day moving average for the first time in four weeks. It was flat at 83.35 yen, recovering earlier losses suffered on selling by Japanese exporters.
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