Euro near two-week low vs dollar on political worries

LONDON: The euro hovered within sight of a two-week low against the dollar on Monday as euro zone political uncertainty curbed demand for the single currency.

Many strategists said the euro's retreat from a 15-month high hit at the start of February was justified given the weakness in the euro zone economy, as well as political risks in Spain and Italy, and worries about Cyprus's bailout package.

Some market players were also cautious before a G20 meeting later in the week where policymakers may air concerns about recent euro strength and the potentially destabilising effect of "currency wars", in which countries deliberately target lower exchange rates to boost export competitiveness.

The euro edged up 0.1 percent on the day to $1.3381, holding just above Friday's low of $1.3353, which was the lowest level since Jan. 25. Morgan Stanley strategists said the euro could pull back towards $1.3260, where there is support from the 50-day moving average.

The dollar index rose to a one-month high of 80.298.

"The pace of the euro's gains in January made me feel uncomfortable, it was too far, too fast. We should have a period of consolidation over the next few months," said Jane Foley, senior currency strategist at Rabobank.

"But if news from Cyprus, Spain and Italy is not good we could see $1.30 again."

Since hitting a peak of $1.3711 on Feb. 1, the single currency has shed about 2.5 percent.

It sold off last week after European Central Bank President Mario Draghi kept alive expectations of rate cuts and said the bank would monitor the economic impact of a strengthening currency.

There are growing worries about Spain as a scandal on secret cash payments engulfed the prime minister, while confidence in Italy has been shaken in the run-up to the Feb. 24-25 election.

A strong campaign by former Prime Minister Silvio Berlusconi has opened up the race and threatened the prospects of a stable government emerging after the vote.

There are also concerns about the terms of financial aid package for Cyprus, a matter that will be high on the agenda at a meeting of euro zone finance ministers in Brussels on Monday.

"Better financial conditions are likely to be offset by rising political risks, market positioning and a weaker economy. We expect the euro to be on a declining trend beginning in Q2," said Aroop Chatterjee, analyst at Barclays Capital.

With much of Asia shut for the Lunar New Year holidays, moves in currency markets were muted on Monday, although traders were braced for more volatility later in the week with US retail sales, European GDP data, and a Bank of Japan policy meeting taking place.

BOJ MEETING EYED

The Bank of Japan is expected to keep monetary policy steady, particularly as Japanese authorities have come in for criticism for allowing the yen to weaken.

In thin trade the euro rose 0.3 percent to 124.29 yen , pulling way from Friday's one-week low of 123.43.

The dollar climbed 0.3 percent to 92.93 yen, having surged to a 33-month high of 94.075 yen last Wednesday. Market players reported US investors selling the yen.

In the past few months, the yen has slumped as Prime Minister Shinzo Abe put intense pressure on the central bank to take aggressive easing measures to revive the economy.

The Australian dollar dipped 0.3 percent to US$1.0276, nearing a three-month low of $1.0256 hit last week after the Reserve Bank of Australia left the door open to more rate cuts.