The euro hovered near a four-month low on Wednesday after Cyprus rejected terms of a proposed bailout, creating uncertainty about the country's financial future and reviving fears about the stability of the euro zone. Cyprus overwhelmingly rejected a proposed levy on bank deposits as a condition for a European bailout on Tuesday, throwing international efforts to rescue the latest casualty of the euro zone debt crisis into disarray.
The general assumption in markets, however, is that the European Union, as so often before, will thrash out a deal that keeps Cyprus in the single currency. "European officials have repeatedly come out with last minute plans to save the day, and I think down at these levels, that's a major reason why the market isn't chasing it aggressively," said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore, referring to the euro's moves against the dollar.
The euro held steady at around $1.2877, near its 200-day moving average. On Tuesday, it dropped below that support and touched a four-month low of $1.28435 on trading platform EBS. Further losses were prevented only after the European Central Bank said it was committed to providing liquidity to Cypriot banks within certain limits. EU countries had warned they would withhold 10 billion euros ($13 billion) in bailout loans unless depositors in Cyprus, including small savers, shared the cost of the rescue.
The unprecedented plan to impose taxes on citizens' savings in Cyprus, announced over the weekend, has stirred worries that savers in other, larger European countries might be spurred to withdraw their bank deposits. There is also concern that it could serve as a precedent for any future bailouts in the euro zone. Depositors in euro zone countries outside the Cyprus are unlikely to immediately start withdrawing their deposits, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.
However, the chances of that happening may now be higher, in the event of any acute increase in worries about a euro zone country's fiscal woes or the health of its financial sector, Okagawa said. "If things stay quiet that will be okay, but I think there are now question marks about possible shock absorbers in the case of any turmoil," he said. The yen edged higher in thin market conditions, with Japanese financial markets closed for a national holiday.
The euro slipped 0.2 percent to 122.39 yen. The dollar fell 0.1 percent to 95.04 yen. The market is wary of any comments from Haruhiko Kuroda, who becomes governor of the Bank of Japan on Wednesday. Expectations are high that Kuroda will quickly embark on a much more aggressive monetary policy to fight deflation, perhaps even before the BOJ's next scheduled policy meeting in early April. The focus is also turning to the end of a two-day US Federal Reserve policy meeting on Wednesday.