The euro fell from a five-month high against the US dollar on Monday as worries about fiscal debt problems in eurozone countries such as Ireland weighed on the currency. Monday's downgrade of Anglo Irish Bank's lower-grade debt pushed the euro to session lows. That led to the widening of the Irish/German 10-year bond yield spread as investors demanded additional premium to hold Irish government bonds over benchmark Bunds.
The increase in the yield spread also helped push the euro lower after hitting the five-month high above $1.35. "The euro right now is being pulled in a tug of war between the sovereign debt crisis still existing in the euro zone versus the prospect of a very serious QE2 (another round of quantitative easing) out of the US," said Boris Schlossberg, director of FX research at GFT in New York.
The Federal Reserve last week signalled it could loosen US monetary policy further to support a sluggish economy, fuelling a massive dollar sell-off. Against the yen, the dollar fell to 84.11 yen earlier on EBS trading platform, its weakest level since Japan intervened in the currency market about two weeks ago. With dollar/yen trading near the lows, investors are on alert about possible further intervention by Japan to stem the yen's strength.
Still, the Japanese currency was more than a yen above the 15-year low of 82.87 hit shortly before Japanese authorities acted to sell the yen for the first time in six years. The euro rose as high as $1.3507, according to electronic trading platform EBS, its highest since April. It was last slightly lower at $1.3474, down 0.1 percent on the day.
The euro's next short-term key level was around $1.3511, a 50 percent Fibonacci retracement of its fall from $1.5145 last November to its June low around $1.1876. Over the next few weeks, the next stop is likely to be the 55-week moving average which comes in at $1.3630, according to CitiFX in a research note. The bank said there is solid resistance above that level, specifically at $1.3670-$1.3740 where the highs from December 2004, April 2007 and March 2009 converge.
If the results highlight more banking sector troubles, traders may turn cautious on the euro, though other analysts say a withdrawal of funds from the system will boost lending rates and provide support for the euro zone single currency. The latest data from the Commodity Futures Trading Commission showed currency speculators moved to a net long position in the euro for the first time this year. The dollar index fell earlier to 79.188, the lowest since early February. It last traded at 79.385, down 0.01 pct. The dollar index broke below 80 last week, where the 55- and 200-weekly moving averages were located.
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