Reuters: US Dollar Report: FOREX-Euro falls vs dollar on fears debt crisis may spread

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FOREX-Euro falls vs dollar on fears debt crisis may spread May 25th 2012, 17:25 Fri May 25, 2012 1:25pm EDT * Spain's Catalonia asks for help, raises contagion fears * Uncertainty in Greece keeps sentiment bearish NEW YORK, May 25 (Reuters) - The euro slipped to near two-year lows against the dollar on Friday, rattled by fears of a possible Greek exit from the euro zone and the risk other debt-plagued countries could also leave the bloc. A plea from Spain's wealthiest autonomous region, Catalonia, for help from the central government to refinance its debt this year was the latest news to hit the euro, which was on track for its worst weekly showing in five months.. Catalonia's appeal reverberated across financial markets. Spanish and Italian bonds sold off, equities fell, and U.S. crude oil futures turned negative. "The Catalonia news was a big deal because it implies that the Spanish government may have to take on more debt and it cannot afford to do so," said Richard Franulovich, senior currency strategist at Westpac Securities in New York. "It looks like all the euros that were bought need to be resold. For now, it's all about contagion," he added. In mid-afternoon New York trading, the euro slipped 0.2 percent to $1.2511, after earlier falling to a nearly two-year low of $1.2495, using Reuters data, taking out a key options barrier at $1.25. The common currency has lost 5.5 percent against the dollar so far this month and is facing its fourth straight week of losses, raising the possibility of a test of the 2010 low of $1.1875. It has dropped 2.1 percent this week, placing the euro on pace for its worst weekly performance since mid December. Macro funds and institutional investors have ramped up euro selling after an inconclusive election in Greece left the country at risk of bankruptcy and a possible exit from the euro zone. "I think markets are pretty complacent about a Greek exit," said Gabriel de Kock, executive director of FX research at Morgan Stanley in New York. "Everyone says it's going to happen, but if it does, the Europeans will have to do extraordinary things to avoid contagion of the sort that could knock out Ireland, Spain and Portugal pretty quickly. So people are not ready." Greeks vote again on June 17, with polls showing a close race between parties supporting and opposing the austerity measures that are part of the terms of the country's international bailout, keeping markets on tenterhooks. Investors are also concerned about the health of the Spanish banking sector, chances of a deep and damaging slowdown in the euro area, and the lack of any aggressive policy measures to address the escalating debt crisis. Spanish lender Bankia, which was partly nationalized this month, was set to ask the government for a bailout of more than 15 billion euros (US$19 billion) on Friday, a financial sector source told Reuters. Many strategists expected euro selling to continue next week, although heavy short positioning could slow the momentum. Investor nervousness was well reflected in the options market, as euro/dollar one-month implied volatility hit 13.13 percent for a second straight day. It was last at 12.2 percent, well above its 50-day simple moving average. Brad Bechtel, managing director at Faros Trading in Stamford, Connecticut, said the uncertainty surrounding Greece is likely to keep trading volatile and unpredictable. "By and large, people are more comfortable being short euro or long volatility, but at the same time, you get to points like right now when we're very stretched," said Bechtel. "Then, you can get very quick 2 percent to 3 percent snap-backs. It forces everyone to be day traders, speculators as opposed to investors." Against the yen, the dollar was up 0.1 percent at 79.65 yen , supported by Tokyo importers and investors squaring positions ahead of a long holiday weekend in the United States. Sell offers around 80.00 yen were poised to cap any further gains, traders said. U.S. markets will be closed on Monday for the Memorial Day holiday. The euro was flat against the Swiss franc at 1.2007 francs, having jumped to 1.2075 francs on Thursday, its highest level since mid-March on market talk the Swiss government is going to impose a tax on deposits and chatter that the Swiss central bank initiated a short squeeze in the pair. Traders said the Swiss National Bank has been buying euros in the past few weeks to protect the floor at 1.20 francs, although some investors were still piling on bets through the options market that the peg will be breached in coming days if the euro zone crisis escalates. Link this Share this Digg this Email Reprints

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