The euro erased gains made earlier on Monday against the dollar after a deal between Cyprus and its lenders removed the immediate threat of financial meltdown but markets still fretted about the future implications of the bailout. Worries about an economic slowdown in the currency bloc, political uncertainty in Italy, and prospects of the European Central Bank easing monetary policy in coming months to support growth were also expected to weigh on the currency.
The euro was down 0.1 percent at $1.2980, off a session high of $1.3050 and not far from a four-month low of $1.28435 set last Tuesday as investors took profits on its rise. Reported large option expiries at $1.30 were likely to keep the currency close to current levels, analysts said.
The euro was marginally higher at 123.185 yen, well below the Asian high of 123.85 yen. Although the Cyprus bailout relieved some anxiety in markets and pushed the euro higher, analysts remained sceptical it could inspire confidence among international investors. Some investors could see the deal as a template for future bailouts in bigger euro zone countries with struggling banking sector, they said.
"The way that this bailout has been found, and the compromises there, could have much longer-lasting ramifications. It does set a bad precedent for the rest of the euro zone, in particular those countries that have a weakened banking sector," said Jane Foley, senior currency strategist at Rabobank.
"It is very worrying that expropriation of private sector capital is taking place. It increases the risk of a bank run and when it next happens it is unlikely that ECB policies of (providing a) back stop will work then," said Peter Kinsella, currency strategist at Commerzbank. Despite the bailout removing immediate concerns Cyprus might be forced out of the euro zone, worries about the bloc's economy and uncertainty over forming an Italian government could hamper any substantial gains in the euro. By contrast, analysts said evidence of a sustained pick-up in the US economy was pushing interest rate differentials in favour of dollar assets.
Data showed speculators increased their bets against the euro while bets in favour of the dollar rose in the latest week to their largest since the week of July 17. The dollar was up 0.3 percent at 94.78 yen. The Japanese currency, which tends to gain in times of financial stress. retreated broadly as worries over Cyprus eased.
Market expectations that the Bank of Japan will unveil aggressive monetary stimulus at its next policy meeting on April 3-4, the first under new BOJ Governor Haruhiko Kuroda, are seen likely to support the dollar against the yen in the near term. Analysts say, however, that with expectations for drastic BOJ monetary easing already high, the dollar could run into some selling if policymakers disappointed at next week's meeting.
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