Euro falters on French bank woes, more losses seen

NEW YORK: The euro declined against most major currencies on Wednesday and its outlook remained bleak on persistent global economic uncertainty and worries about euro zone banks with large exposure to peripheral debt.

French bank stocks were hit hard in Paris trading, with Societe Generale shares closing down nearly 15 percent. A Societe Generale spokeswoman denied all market rumors about the bank. It also asked France's stock market regulator to launch an investigation into the source of the rumors.

Steep losses in the French banking sector spilled over to the US stock market, which closed sharply lower. Wall Street has yet to recover from Friday's US credit rating downgrade by Standard & Poor's.

"The outlook for the euro is not too good with the Dow Jones Industrials closing the way it has," said Alex Sinton, senior Dealer at ANZ Institutional in Auckland, New Zealand.

"I think Asia will obviously take a second wave" of selling in the euro, he said, adding he expects further losses in equities. "Yield is perhaps holding up the euro. However, that has to be removed in light of the troubles likely to come."

In late New York trading, the euro last traded down 1.2 percent at $1.41940 after sliding to a session low of $1.41620 on trading platform EBS. Traders said leveraged accounts have been sellers of euros.

ANZ's Sinton expects traders in Asia to test euro/dollar support of around $1.41200.

The euro lost 1.5 percent against the yen to 109.098 yen, after earlier falling to a roughly five-month low at 108.300.

"The euro could weaken modestly over the medium term," said Wells Fargo in a research note. "European bond markets remain unsettled, and expectations have switched from ECB (European Central Bank) tightening to ECB easing."

The euro zone common currency also came under pressure on earlier market talk of a possible downgrade of France's AAA credit rating. The country is seen as vulnerable after Standard & Poor's cut the United States' credit rating by one notch to AA-plus last Friday.

But those concerns faded after all three major ratings agencies -- Fitch Ratings, Moody's and Standard & Poor's -- reaffirmed their AAA ratings on France with a stable outlook.

YEN NEAR RECORD HIGHS VS DOLLAR

The dollar fell 0.3 percent to 76.862 yen. It hit a session low of 76.347 on EBS, not far from its record low of 76.25 touched in March and keeping investors wary that Japanese authorities may step in again to stem gains in the currency.

Traders, however, said there does not seem to be much action in dollar/yen as investors on Wednesday preferred to go long in the Japanese currency against the euro. The euro still has a long way to go from record lows seen in mid-March.

Against the Swiss franc, the euro dropped 0.7 percent to 1.03140 Swiss francs. The franc soared as high as 1.00750 per euro on Tuesday, edging close to parity.

Implied volatility, a measure of the market's expectations of future movements, remained at extreme levels, with one-month euro/Swiss franc implied vols at 25.65 percent on Wednesday. The currency pair's one-month vols surged to a record 32 percent on Tuesday.

The dollar rose 0.6 percent against the Swiss franc to 0.72680 franc after the Swiss National Bank said it would significantly boost franc supply in the coming days in a bid to stem the currency's rally and is still looking at a whole range of measures to slow its surge.

The dollar plunged more than 5 percent against the franc at one point on Tuesday, its worst trading day ever.

Analysts, however, said the SNB's measures would do little to halt exceptionally strong demand for the safe-haven franc after the Federal Reserve on Tuesday underlined the state of the struggling US economy and promised to hold interest rates low for at least two years.

Goldman Sachs said it expects the dollar to weaken and recommends clients go short on the greenback on additional easing from the Fed.

"The Fed ... said it stands ready to increase its balance sheet further, leading our US economists to think (a third round of quantitative easing) now has a more than even chance of becoming a reality," Goldman wrote in a note.

The higher-yielding Australian dollar dropped 1.5 percent against the US currency, while the New Zealand dollar plunged 3.3 percent.

Copyright Reuters, 2011