Investors also see less risk of repeated euro zone rate hikes
What the euro needs is a resolution to the Greek crisis and the herve leger batik dress politicians and the central bankers do not appear to be close to finding one,” said Kit Juckes, currency strategist at Societe Generale. “That uncertainty is weighing on the euro and I expect it to be stuck in a $1.40-$1.47 range.”
Against the safe-haven Swiss franc, the euro was flat at 1.2100 francs EURCHF=, having fallen to a record low 1.2049 earlier in the day.
European policymakers appeared deadlocked on how private investors could be involved in some form of restructuring of Greek debt. The European Central Bank is opposed to German proposals for a bond swap, arguing that it would trigger market turmoil. And Bundesbank head Jens Weidmann in comments released at the weekend said he was against extending the maturities of Greek bonds held by the ECB in any “soft” restructuring.
German and French banks were leaning towards contributing to a Greek rescue, even as herve leger bandage dresses it remained unclear how they could do so without triggering a default or credit default swap contracts. [ID:nLDE75A065]
Investors also see less risk of repeated euro zone rate hikes in the months ahead. Even as ECB President Jean-Claude Trichet signalled a rate hike is on the way in July, the ECB left inflation forecasts for 2012 little changed, prompting traders to slash expectations for higher policy rates.
As such, the euro’s uncertain outlook saw implied volatilities rise with risk reversals also widening, suggesting more downside risks for the single currency.
One-month EUR1MO= implied vols were trading around 12.15 percent, up from 11.05 at Friday’s European open. The one-month 25-delta risk reversals EUR1MRR=ICAP were at around 2.00 in favour of euro puts compared to 1.75 Friday.
RISKS RISE
The euro’s woes have been compounded by a drop in global stocks that has prompted some market players to unwind carry trades funded with the U.S. dollar.
Forex analysts at Citigroup warned that investors appear overly optimistic that central banks would provide more support if stocks and other risky assets fell sharply.
The Federal Reserve will have a high hurdle for more quantitative easing, fiscal policy is set to tighten in the United States, and emerging market central banks are lifting rates just as many commodity and stock markets are already richly valued, Citi said.
“This time the assumed policy response may be much more limited than in the last two years, and probably less effective,” said Steven Englander, head of G10 FX strategy at Citi.
The dollar was flat at 80.37 yen JPY=, having clawed back up from a one-month low of 79.693 struck last week on buying by Japanese importers. The dollar index .DXY was also flat at 74.794.
The New Zealand dollar tumbled after a series of powerful earthquakes shook Christchurch, four months after the city was badly damaged by a 6.3 magnitude quake. [ID:nL3E7HD04S]
Processing your request, Please wait....
