Euro Slipped Versus The Dollar For A Second Day
Online, March 24, 2011 (Newswire.com) - On Thursday, the EUR/USD slipping to a low of 1.3889 for a second day. Investors argued what the outlook for higher euro zone interest rates will mean for peripheral euro nations already struggling with fiscal problems. In the days after hawkish comments from European Central Bank President Jean-Claude Trichet after a policy meeting last Thursday, the euro had climbed above $1.40.
During the overnight, Greece's ten year yield climbed to 12.77%, which was the highest since the euro was introduced in 1999. As the risk for contagion intensifies, the governments operating under the fixed exchange rate system may continue to face higher borrowing costs. As European policy makers maintain a relaxed approach in address the debt crisis, market participants speculate Portugal to share Ireland's ill fate, and the uncertainties surrounding the real economy certainly hampers the outlook for the euro as the region faces an uneven recovery. On Monday Moody's slashed Greece's debt rating by three notches and kept it on review for a further possible downgrade. That followed Fitch downgrading Spain's ratings on Friday.
Those announcements brought the sovereign debt problems of some euro zone nations back to the fore and pushed investors to consider that while higher borrowing costs may be good for the underlying currency they will not be good for the nations that have to borrow.
Director of foreign exchange at ING Capital Markets in New York, John McCarthy said, "The problem with the interest rate driven trade and Trichet's hawkish comments is that you have to see the other issues behind it. Higher rates will be devastating on the peripheral countries."
The Swiss franc which has gained broadly from safe haven buying throughout the political uprising in Libya, an early slide in oil prices encouraged investors to pare back long positions in that. Against the Swiss franc the dollar jumped as much as 1 percent.
Extending a retreat from a four month high of $1.4036 hit on Monday, the euro EUR=EBS fell 0.6 percent to $1.3888. Traders said stop loss orders were triggered on the break of $1.3940 and $1.3925 and possibly $1.3885. While options expiries due at 1500 GMT, including at $1.3900, $1.3990 and $1.4000, may keep it hemmed, though, traders said buying by sovereign accounts helped to cap the euro's losses. A London based trader said, "We're seeing continued euro/dollar selling from the real money community. It feels like the market wants to target 1.3880-1.3850."
Before Trichet's hawkish comments, following a break of the $1.3862 February peak, the next technical level is $1.3830, the low hit on Thursday. Then the euro could be heading towards $1.35 though investors say the euro is still supported by expectations the ECB may raise interest rates next month.
On March 24-25, Euro zone countries are ironing out measures to resolve the region's debt crisis in time for a European Union summit. Any sign leaders are struggling to reach a consensus on a debt rescue fund could trigger more profit taking in the euro as they will meet at a preliminary summit on Friday.