Euro drops vs dollar, yen on EU rescue plan skepticism

NEW YORK: The euro dropped against the dollar and yen on Monday, with investors sceptical that fresh efforts by European policymakers would be enough to stem the debt crisis.

While the euro had earlier bounced on a better-than-expected German sentiment survey and speculation of more support from the European Central Bank, it hit a session low in New York trading after data on new single-family US home sales that was dismal, though in line with expectations.

Investors remain bearish about the euro's prospects, with the single-currency on track for its worst month in 10. They worry about policymakers' ability to put in place credible measures to tackle the crisis.

After a weekend of being told by the United States, China and other countries that they must get more aggressive in their crisis response, European officials focused on ways to beef up their existing 440 billion-euro rescue fund.

"More significant policy actions, primarily in Europe, will likely be needed to reverse the negative sentiment on a more sustained basis," said Vassili Serebriakov, currency strategist at Wells Fargo in New York. "Until then, we see pullbacks in the US dollar and Japanese yen as a near-term buying opportunity."

In New York trade the euro was down 0.5 percent at $1.3424 after falling to an eight-month low of $1.3360 against the dollar in Asian trading. Against the yen it was down 0.6 percent at 102.64 yen, having earlier slid to a decade low of 101.90.

Speculation that the European Central Bank might cut interest rates to help the economy emerged after Ewald Nowotny, an ECB governing council member, said that tightening action cannot be excluded.

Real money investors, long-term investors and proprietary accounts liquidated positions earlier in the session but they moved to cover short positions -- bets that the euro would fall further -- after the German Ifo business index came in a touch better than expected.

Investors are concerned by deep differences over whether the European Central Bank should commit more of its resources to shore up Europe's banks and help struggling member countries.

"There is a fair bit of healthy scepticism about the news flow that has emerged during the weekend with a lot of talk and very little decisions," said Paul Robson, currency strategist at RBS Global Banking. "The market still wants clarity and there is very little of that."

Data from the Commodity Futures Trading Commission showed speculators had raised their net short euro positions to 79,460 contracts in the week to Sept. 20, from 54,459 contracts a week earlier. At the same time, with speculators favouring the dollar's liquidity, bullish bets on the greenback were at their highest since June last year.

The dollar index was down 0.1 percent at 78.416.

While the euro and dollar were lower against the yen, investors were wary of pushing it too much lower given the possibility that the Bank of Japan may intervene.

"Given the elevated uncertainty, we prefer to remain defensively positioned expecting the safe-haven yen and US dollar to continue to outperform heading into year-end," Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ, said in a note.

The dollar slipped 0.4 percent versus the yen to 76.28, not far from an all-time low of 75.94 yen set last month.

Copyright Reuters, 2011