Euro hampered by fragile periphery

Thursday, 11 November 2010 22:44 - - {{hitsCtrl.values.hits}}

London (Reuters): The euro dipped on Thursday after skidding to a five-week low the previous day, with tensions in the euro zone periphery expected to trigger further selling and a potential retest of key technical support.

United States money printing plates are seen at the Museum of American Finance in New York

The dollar lost steam after four days of gains but remained close to significant barriers which, if broken, could see its short-covering rebound stretch higher against the likes of the yen and euro.

“There are mounting tensions in the euro zone, with Portugal’s bond auction yesterday showing yields are on a strong rise,” said Lutz Karpowitz, currency analyst at Commerzbank.

“This, together with problems in Ireland, is putting pressure on the euro and I would expect further downward movement from here,” he said.

Ireland is battling to prove it does not need a Greek-style rescue to help it reduce the worst budget deficit in Europe. The Irish central bank governor said on Wednesday a huge bank recapitalization program had failed to reassure investors.

Portugal’s final debt issue this year drew solid demand on Wednesday but at a high price as the euro zone peripheral states remained under pressure.

“The euro faces a serious threat in the form of a spiraling peripheral debt situation. It’s only the negativity surrounding the dollar that’s saving euro/dollar from a sharper correction lower,” said Tom Levinson, currency analyst at ING.

The euro traded at $1.3756 versus the dollar, down 0.2 percent on the day, holding above a five-week low of $1.3670 hit on Wednesday.

Traders said demand for downside options was increasing, with one-month $1.3200 strikes proving popular, while technical analysts said a daily close below the October low at $1.3690 would be needed for the euro to make a further significant move lower.

In Seoul, Group of 20 leaders gathered to discuss currencies and global economic imbalances. But negotiators wrangled over the wording of a communique expected on Friday, and the statement was not expected to venture much beyond a finance ministers’ agreement last month.

“There’s pressure for the G20 to add meat to the bones after the recent meeting of finance ministers, but we should set our expectations pretty low,” said Levinson at ING.

Former U.S. Federal Reserve Chairman Alan Greenspan said in the Financial Times that the United States was pursuing a policy of weakening the dollar but Treasury Secretary Timothy Geithner shot back, telling CNBC Washington would “never do that.”

The dollar index, which measures the greenback against a basket of currencies, was up 0.1 percent at 77.774.

After rising almost to its September low of 82.87 yen on Wednesday, the dollar was holding above 82.00 yen. Even if 82.87 were to break, traders said option barriers at 83.00 would hamper further dollar gains.

The Veteran’s Day holiday in the United States, where some markets will be shut, was helping keep the market subdued.