Euro drops to 8-1/2 mth low vs dollar on Greek woes

NEW YORK: The euro fell to its lowest in more than eight months against the dollar on Monday, as mounting fears of a Greek default deepened after the debt-ridden country said it will not be able to meet its deficit target set out under the bailout plan.

Further adding to negative sentiment on the euro and the generally risk-averse mood in the market was a move by Moody's to place Franco-Belgian financial services group Dexia on review for possible downgrade.

Dexia has been undermined by its exposure to Greece, raising pressure on its state shareholders to consider a second bailout.

Alex Sinton, senior dealer at ANZ Institutional in Auckland, New Zealand said the euro's losses were partly due to the fact that "there has not really been any resolution on the EU (European Union) side with Greece and their approved budget misses the targets it needs to achieve."

Greek officials said the country will not meet its deficit target for 2011 even as it imposes austerity measures to boost revenue and cut future borrowing needs, which are requirements imposed by the EU and International Monetary Fund before they could disburse more cash to pay maturing debt.. Without the funds, Greece will likely default, a scenario that is being increasingly priced in by the market.

In early afternoon trading, the euro was down 1.0 percent at $1.3253 on electronic trading platform EBS, having fallen to a low of $1.32330 -- its lowest since mid-January.

Technically, ANZ's Sinton pointed out that the euro looked "a little over-extended," and could retrace its losses and potentially rise in the Asian session to the $1.3310 area.

Against the yen, the euro was down 1.6 percent at 101.500 yen . Earlier it touched a low of 101.400, the lowest since at least 2004 on EBS.

"The economic and financial climate continues to cool and incertitude will force wary investors to maintain a defensive posture," said Jessica Hoversen, foreign exchange analyst at MF Global in New York.

"The US dollar will stay the chief beneficiary of the dampened outlook for growth and the escalating crisis in Europe."

Euro zone finance ministers were meeting on Monday and are expected to put pressure on Greece to implement agreed structural reforms and to discuss options for leveraging the European Financial Stability Facility .

EURO ZONE MANUFACTURING CONTRACTS

As the debt crisis showed little sign of abating, the euro zone's manufacturing contraction worsened in September as new orders shrank at their fastest pace since June 2009.

Investors are also awaiting a European Central Bank interest rate decision on Thursday. Some market players are expecting it to cut rates by 25 basis points and announce fresh liquidity measures to support the banking sector.

Speculators have also been adding to their bearish bets against the euro and this trend is likely to continue .

The options market further points to a strong appetite for long-term euro/dollar puts -- bets that the euro will weaken. One-year risk reversal spreads remain near a record high hit recently.

Risk reversal skews favoring the downside in the euro against the dollar are further supported by positioning among hedge funds and short-term investors.

For Christian Von Strachwitz, chief investment officer at Quaesta Capital in Zurich, Switzerland, long US dollar positions versus the euro dominated his portfolio last week, a trend that has been in place for the several weeks. Quaesta is a currency fund of funds with assets of $3 billion.

The euro has also seen the biggest outflow in the latest week, he added.

In other currency pairs, the dollar eased 0.5 percent against the yen to 76.640 yen having hit a two-week high at 77.27 yen on EBS. Orders are seen around 77.50, traders said.

Tokyo dealers also reported that macro funds have been building long dollar positions and analysts said if the current euro zone crisis deepened, the yen could weaken versus the dollar this time, unlike the global financial crisis in 2008.

Copyright Reuters, 2011