Euro breaks $1.40 on debt fears

NEW YORK: The euro fell broadly on Monday, hitting a two-month low against the US dollar and a record trough against the Swiss franc, with more losses expected on fears the euro zone sovereign debt crisis is spreading.

Speculation mounted over some sort of Greek debt restructuring, while doubts grew about Spanish austerity measures after Madrid's ruling Socialist party was defeated in regional elections and Italy suffered a credit outlook downgrade.

The euro fell beneath key support at $1.40, with weaker equity prices adding to pressure. Analysts expect the euro to remain under selling pressure this week, but added that its losses against the dollar could be limited should US economic data disappoint investors.

‘We have a confluence of negative events that have taken place over the weekend. All of that is compounding to create this toxic mix for the euro.’ said Mark McCormick, currency strategist at Brown Brothers Harriman in New York.

The euro fell as low as $1.3968 on trading platform EBS, its weakest since mid-March, after breaking below $1.40, a key psychological level which was also around its 200-week moving average.

It later bounced back slightly to trade at $1.4007, down 1 percent on the day, partly helped by bids from Asian central banks at around $1.3965, the 100-day moving average.

Greece will launch the first wave of its 50-billion-euro privatization program with sales of Hellenic Postbank and the ports of Piraeus and Thessaloniki, a government official said.

Prime Minister George Papandreou discussed new emergency measures with his cabinet on Monday to cut the deficit in an effort to convince lenders Greece can survive a debt crisis without a restructuring.

Euro selling pressure grew after spreads on benchmark Spanish, Italian and Greek government bonds widened against German benchmarks as investors dumped the bonds of weaker euro zone countries in favour of safer German debt.

The euro fell to 1.2323 Swiss francs, its lowest since the euro zone single currency was launched in 1999. Selling accelerated after stop-loss orders were triggered below 1.24, while an option barrier was taken out at 1.2350.

OPTIONS SIGNAL DOWNSIDE

Weaker economic data added to the euro's woes as German and euro zone purchasing managers' indexes for May fell more than expected.

Traders cited stop-losses building below $1.3965 while pricing in the options market suggested the risks for the euro were more towards the downside.

Euro/dollar one-month implied volatility jumped to around 13.1 percent from 11.70 percent on Friday, suggesting trading may get more erratic if euro selling continues.

One-month euro/dollar risk reversals rose to 1.8 from 1.45 in favor of euro puts. The rising premium required to protect against more euro selling suggests that the euro could fall even more.

Brad Bechtel, managing director of Faros Trading in Stamford, Connecticut, said the euro/dollar is likely trading at the bottom of a new range and the consolidation could continue for another one or two weeks with ‘plenty of nasty head fakes’ in both directions.

‘Keep your seatbelt fastened for now and expect short-term choppiness on any new risk positions,’ he said.

The dollar was a big beneficiary of euro weakness, hitting a seven-week high of 76.366 versus a currency basket, before slipping back to be up 1.1 percent at 76.265.

Some analysts say that although the outlook for the euro appeared grim the dollar's gains could be short-lived given concerns about the US fiscal deficit and patchy economic data. Key US data releases this week include durable goods, housing and a second reading of first-quarter growth.

‘It's possible that people will be reminded that the Fed is going to remain on hold and the European Central Bank is probably going to hike in July. Maybe we can form a base around $1.39 and push the euro back up,’ said BBH's McCormick.

Copyright Reuters, 2011