Euro down on weak growth, France-Germany summit ahead

NEW YORK: The euro fell across the board on Tuesday as weak German and euro-zone growth data sparked concerns about a slowdown, damping risk appetite and boosting demand for the safe-haven Swiss franc, yen and dollar.

Investors are also focused on a summit where French President Nicolas Sarkozy and German Chancellor Angela Merkel will discuss the region's debt crisis. Few analysts, however, are counting on a credible solution to the euro zone's fiscal problems.

Ahead of the meeting of the two leaders, data showed Germany's gross domestic product growth slowed to 0.1 percent in the second quarter, below the consensus forecast of 0.5 percent. That pushed the euro down more than 1 percent against the Swiss franc.

GDP data from the euro zone showed the region's economy grew by just 0.2 percent over the same period, adding to pessimism about the currency bloc already struggling with an escalating sovereign debt crisis.

These concerns are likely to make investors wary about the euro in the coming days.

"Weaker-than-expected euro zone data has cast a pall on the market and raised risk aversion levels," said George Davis, chief technical strategist, at RBC Capital Markets in Toronto.

"As a result we've seen the euro come off and commodities down as well. We're also seeing a bid in the US dollar,"

In early New York trading, the euro was down 0.4 percent versus the dollar at $1.43830, with support at its 100-day moving average around $1.43511. Subsequent buy attempts have been tempered by Eastern European selling below $1.4400, traders said.

Sell-stops are cited below $1.4320, while on the topside there is talk of option barriers at $1.45. The euro reached a nearly three-week high of $1.44779 on Monday.

Analysts said the euro-dollar trade is a technical downtrend channel, with selling pressure expected above $1.44-$1.45.

SARKOZY-MERKEL MEETING

Sarkozy and Merkel will meet in Paris from 1400 GMT and a joint news conference is expected at 1600 GMT. Investors will be keen for any sign of progress on the issuance of common euro zone bonds, even though officials in Paris and Berlin said that issue will not be addressed in Tuesday's talks.

Germany, along with the Dutch government coalition party, has voiced its objection to a euro bond issuance.

Analysts said while the summit would be closely scrutinize the meeting could be a disappointment, with no concrete or long-lasting solution to a debt crisis that has spread from the euro zone's periphery to the core economies of Italy, Spain, and most recently, France.

But some are not ruling out a positive outcome.

"There is potential for surprise after the attempt to lower expectations. At the very least, some discussion of a tightening of the enforcement of EU budget rules and some increased coordination efforts," analysts at Brown Brothers wrote in a research note.

The euro fell to 1.12020 francs, down 1.1 percent in the wake of the German GDP data, giving back most of Monday's gains. It trimmed losses on talk the Swiss National Bank was checking currency forward rates. The SNB later declined to comment.

The Swiss franc slid against the dollar and euro the last few sessions on speculation the SNB may take drastic measures to curb gains in the currency by setting a cap on the franc and pegging it to the euro.

Uncertainty on potential SNB action has showed up in the options market, with implied volatilities, a measure of a future movements, staying elevated. On Tuesday, euro/Swiss franc one-month implied volatilities were trading at 20.35 percent. In April, volatilities were down at 8.5 percent.

The dollar was flat against the yen at 76.80 yen, dropping back to levels seen before Japan's record yen-selling intervention on August 4, and hovering near a record low of 76.25 yen hit in March.

Copyright Reuters, 2011