The euro dived and traders squeezed the yen higher in Asian trade on Monday as news that Cyprus' bailout plan involves a tax on depositors was taken as a dangerous precedent that could ultimately trigger bank runs elsewhere in the euro zone.
Breaking with previous EU protocol that citizens' savings are sacrosanct, euro zone finance ministers demanded on Sunday that Cypriots pay up to 9.9 percent of their deposits in exchange for a 10 billion euro ($13 billion) bailout, prompting a run on cash.
"It was a big shock to hear that they will tax savings, and the worry is that this could impact larger countries like Spain or Italy. It remains to be seen how European and US markets will react," said Kenichi Asada, manager of forex at Trust & Custody Services Bank.
The common currency sank as low as $1.2888 in early Asian trade, its lowest since December 10, before steadying around $1.2903, or 1.3 percent below late levels in North America on Friday. Against the yen, the euro tumbled 2.1 percent, briefly breaking through support at 121.681, its 55-day moving average, which analysts said could herald a deeper correction. It last bought 121.860 yen. The common currency also lost ground on the Swiss franc to 1.2186 francs, from around 1.2275.
"People were already cutting their exposure to riskier assets and this has been a further catalyst for those who are long to cut back on them," said Takumi Nomura, senior trader at the Bank of Tokyo-Mitsubishi UFJ. The yen shot higher across the board as speculative sellers were caught badly short of the currency, and had to quickly unwind carry trade positions. Borrowing in the Japanese currency to buy higher yielding assets has been a heavily-favoured trade in recent weeks on expectations of more aggressive easing steps from the Bank of Japan.
The dollar was shoved as low as 93.450 yen in volatile trading before dawn in Tokyo, marking its lowest since March 6 and moving away from a 3-1/2 year peak of 96.71 struck on March 12. Later on Monday, it firmed to 94.470 yen. Market participants said it would not be unusual for the yen to firm as far as 90 against the dollar. Last week, the price of yen puts, bets that the yen will weaken, suddenly fell relative to yen calls, bets that the currency will gain. Asada of Trust & Custody Services said there was a cluster of such options around 93 yen to the dollar.
The US dollar was up 0.6 percent on late Friday levels against a basket of currencies at 82.733 on Monday. Turbulent early trade shook the Australian dollar down by almost two full yen to a low of 97.74 yen, its lowest since March 8, before it firmed slightly to 97.83.
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