FOREX-Euro tumbles to 4-year low on debt, growth worries

Published: May 17, 2010

(Reuters) – The euro slid to a four-year low on Monday on sovereign debt worries and fears that planned belt-tightening measures will hurt euro zone growth, fuelling concerns the single currency may face free-fall.

The euro extended its losses after falling below the October 2008 low at $1.2330, where stop-losses from model accounts were said to lurk, and fell as far as $1.2234 on trading platform EBS, its lowest since April 2006.

It has fallen more than 7 percent against the dollar this month, and is about 14 percent lower for the year, making it the worst-performing major currency. The euro’s next major trough on charts lies at $1.1640, a low hit in November 2005.

“The euro is a one-way trade right now and capitulation is on my mind. I can see a move towards $1.2000 at least,” said Kenneth Broux, market economist at Lloyds Banking Group.

At 0705 GMT, the euro had clawed its way back to trade at $1.2310, still down around 0.4 percent on the day. Traders said volatile trade was impacting liquidity, making for exacerbated moves. Offers were said to be building above $1.2330.

Analysts said the widening euro zone problems had prompted a money market dollar liquidity shortage.

“If the sharp deterioration in money markets persists into this week, look for central bank action to lower the cost of access to their dollar funding facilities,” Citibank analysts said in a note.

“People have no idea what it will take to get out of this situation as they have seen the euro plunge despite a massive rescue package,” said Minoru Shioiri, chief manager of FX trading at Mitsubishi UFJ Morgan Stanley Securities. “There are very big concerns about the euro zone.”

A 750 billion euro rescue package from the European Union and the International Bond Fund aimed at shoring up euro zone bond markets has done little to underpin the euro.

On Friday, the single currency euro plunged after European Central Bank policymaker Axel Weber said it was important not to underestimate lingering dangers to financial stability. [ID:nLAG006286].

German Chancellor Angela Merkel said on Sunday the rescue plan put together by the European Union and the International Monetary Fund had only bought time to sort out the yawning gap between the euro zone’s strongest and weakest economies. [ID:nLDE64F0FQ].

Traders fear the austerity measures announced by Greece, Spain and Portugal would hurt growth in the near term and force the European Central Bank to keep rates low in the medium term.

Data released on Friday showed speculative bets against the euro hit a record high in the week to May 11. [ID:nN14193796].

Against the yen, the euro fell more than 1 percent to 112.47 yen EURJPY=R, heading closer to an eight-year low of 110.49 yen hit earlier this month.

Sterling slid to its lowest since March 2009 at $1.4249 GBP=D4 before rising back to $1.4418, still down 0.85 percent on the day. The pound fell on stop-loss selling and data suggesting the past year’s rise in British house prices may be cooling. [ID:nLDE64C1G4]

Weakness in the euro and the pound helped the dollar index .DXY, which rose above 87.00, the highest since March 2009.

The yen rose broadly, boosted as risk aversion increased. The Australian and the New Zealand dollars dropped more than 1 percent against the yen AUDJPY=R NZDJPY=R.

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