Reuters: US Dollar Report: FOREX-Euro falls to almost two-year low on Greek fears

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FOREX-Euro falls to almost two-year low on Greek fears May 23rd 2012, 15:46 Wed May 23, 2012 11:46am EDT * Euro slumps across the board before EU summit outcome * Dollar index hits highest since Sept 2010; yen firmer * Growth-linked currencies pounded By Gertrude Chavez-Dreyfuss NEW YORK, May 23 (Reuters) - The euro plunged against the dollar to its weakest level in nearly two years on Wednesday on growing fears Greece will leave the euro zone and widespread doubts about the outcome of a European summit later in the day. Eurpean Union leaders are expected to discuss growth-boosting measures, but are not expected to produce any plan that would restore optimism among investors, especially given Germany's strong opposition to joint euro bonds. Euro zone officials have told members of the currency area to prepare contingency plans in case Greece quits the bloc, an eventuality which Germany's central bank said would be testing but "manageable," three officials told Reuters. "The euro is mostly selling off because of the dysfunctional process. We don't know what's going to happen and we don't know what the European leaders want - there is no leadership," said Axel Merk, portfolio manager of the $650 million Merk Hard Currency Fund in Palo Alto, California. He said talk about a Greek exit assumes that Greece could realistically pull it off. "The market is giving Greece way too much credit. I don't know how it can engineer an exit without Germany's help." The euro fell to $1.25638 on trading platform EBS, its lowest level since July 2010 as real money investors, corporates and macro funds stepped up euro selling. It was last at $1.25883, down 0.8 percent. The common currency also fell against the yen, dropping below 100 yen and hitting its lowest level since early February The euro last changed hands at 99.80 yen, down 1.6 percent. Comments on Wednesday from euro zone leaders about Greece staying in the euro zone briefly helped the euro. French President Francois Hollande said he will do all he can to convince the Greeks to stay within the euro zone, while Spain's prime minister, Mariano Rajoy, said Greece's best option is to stay within the bloc. . But once the option barrier at $1.26 was taken out, all hell broke loose for the euro. "The whole problem of Greece, of fiscal retrenchment in the euro zone, the lack of growth across the region, and the reactive nature of the authorities are all ongoing," said Richard Batty, investment director for multi-asset investing at Standard Life Investments in Edinburgh, Scotland. "We just don't think there's a quick fix. The unresponsive nature of the authorities with the markets seemingly forcing authorities to action, to our mind is very unhealthy for the euro zone." Standard Life, which manages assets of around $240 billion, has not owned European assets for some time. In the options markets, the euro's slide prompted a surge in volatility. One-month at-the-money implied volatility jumped to 12.3 percent, its highest point in more than three months. Meanwhile, the cost of protecting against a euro decline rose to 2.4 percent on Wednesday, approaching a more than three-month peak hit on Monday. DOLLAR INDEX AT 20-MONTH HIGH Growing worries about a possible exit by Greece supported safe-haven assets and currencies. Reflecting those fears, European powerhouse Germany sold two-year government debt on which it will pay no interest, its first zero-interest issue with such a maturity. Safe-haven currencies like the U.S. dollar and the yen remained the key beneficiaries from the euro zone crisis. The dollar index, which measures the dollar's value against a basket of major currencies, rose to 82.148, its strongest level since September 2010. High-yielding currencies like the Australian and New Zealand dollars fell sharply. The U.S. dollar also advanced to a four-month high against the Swiss franc. Against the yen, however, the dollar fell after the Bank of Japan kept its monetary policy unchanged. While the decision was in line with most expectations, a few participants had been speculating the central bank could follow up with new easing steps after its monetary easing in April. The dollar was down 0.9 percent versus the yen to 79.27 yen, with the Japanese currency recovering from falls on Tuesday after Fitch downgraded Japan's sovereign credit rating. Link this Share this Digg this Email Reprints

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