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Euro down after rally this week, still in downtrend | ASHARQ AL-AWSAT English Archive 2005 -2017
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NEW YORK, (Reuters) – The euro dropped on Friday, as investors locked in profits after this week’s rally sparked by global central bank action to boost liquidity, and could stay weak on any negative news coming out of an EU finance ministers’ meeting.

Analysts said investors also sold the euro, pushing it to session lows against the dollar, after the Bank of Portugal said the Portuguese island of Madeira failed to report information about debts from previous years that amounted to 0.5 percent of gross domestic product in 2010.

“We had a pretty good run-up in euro/dollar the last couple of days from $1.37 to $1.39 because of positive news this week. So we’ve had a bit of a short squeeze,” said Ray Attrill, senior currency strategist, at BNP Paribas in New York.

However, he added that market players remained bearish on the euro and those expecting any new policy initiatives from the European Union finance minister’s meeting will be disappointed.

The euro was last down 0.5 percent at $1.38081, off a one-week peak of $1.39370 hit on Thursday but held above a seven-month trough below $1.35 plumbed on Monday. The euro has gained around 1.8 percent so far this week, its best weekly performance since the week of July 24 on trading platform EBS.

It fell to a session low of $1.37530, with traders saying it extended losses after stop-loss orders were triggered on the break of $1.37700, with more stops at $1.37500.

Overall though investors were reluctant to take large positions ahead of the outcome of an EU meeting in Poland, at which Treasury Secretary Timothy Geithner is a participant.

Geithner told EU finance ministers on Friday they should end loose talk about a euro zonebreak-up and work more closely with the European Central Bank to tackle the debt crisis. He also said Europe would not see similar global financial coordination as there was in 2009, but that Washington would do what it could to help.

Technical charts indicated the euro could find support around $1.3738, the 23.6 percent retracement of the fall from $1.45500 on August29 to $1.34949 on September12.

The euro had hit a one-week high after a coordinated move by central banks on Thursday to provide dollars. Funding strains, evident through the cross currency basis swap market, which had hit some euro zone banks, including large French banks and were impacting the euro, had appeared to be easing.

The three-month euro/dollar cross currency basis swap, or the relative premium for swapping euro LIBOR for dollar LIBOR tightened to around minus 88 basis points from on Friday, a day after the action from global central banks. It narrowed from as wide as minus 115 basis points on Monday.

Wider spreads reflect elevated demand to borrow U.S. dollars in the currency forward market and often supports the greenback’s spot value against the euro

In the options market euro/dollar month implied vols – measure of investor demand to protect against spot price volatility – were steady around 14.20 percent and off this week’s high of around 18 percent.

FED EASING EYED

While investors remain wary of the euro, they are also reluctance to take long positions in the dollar ahead of a Federal Reserve meeting next week, where policymakers may flag another round of quantitative easing to boost the economy.

That move should weigh on the dollar and help riskier assets rally, although analysts said some market players thought “Operation Twist” was the more likely outcome.

In such a scenario the Fed would buy longer dated Treasury bonds and sell shorter dated ones to keep rates at the longer end lower without expanding the balance sheet.

Daragh Maher, FX strategist at Credit Agricole in London said the “Operation Twist” could be positive for the dollar because it would stimulate growth. “It would be seen as delivering stimulus without printing….dollars.”

The ICE Futures’ dollar index was last up 0.4 percent at 76.551. Against the yen, the dollar remained stuck at 76.730 yen, flat on the day. The threat of Japanese intervention has helped keep dollar/yen in a tight range and above its all-time low of 75.94 yen.