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21Jul11
Euro falls in nervous market; choppy ahead of summit
The euro dived on Thursday after Eurogroup President Jean-Claude Juncker was quoted as suggesting a selective default for Greece was possible, prompting investors who had bought the euro in anticipation of progress at a European summit to cut their positions.
A media report quoted Juncker as saying a selective default for Greece could not be excluded, and sent the euro crashing through stops at $1.4235-40, and then through further large stops below $1.4200.
It last traded 0.4 percent lower on the day at $1.4154, down from a high of $1.4294 that was hit in early trade after officials said France and Germany had reached a common position on a second bailout of Greece in a bid to prevent contagion spreading through the euro zone.
Analysts said the currency would remain choppy ahead of the summit due to start at 1100 GMT, and Juncker's comments looked to have been taken out of context.
"The market was long and is quite nervous. This talk of the possibility of a default and the package not being quite as neat as people expected from a banking point of view is not helping," said Sebastien Galy, FX strategist at SocGen.
"There are a tremendous amount of leaks coming through but most of the information we already know. That means technical levels are very important right now."
Downside support for the euro is now seen at $1.4120, the 61.8 percent retracement of the July move higher and the 200-day moving average at $1.3914.
Fears that Greece's debt crisis will spread to bigger economies in the euro zone have kept markets on edge since early July, with yields on Italian and Spanish government bonds reaching euro zone lifetime highs above 6 percent.
Few details of the common Franco-German position were revealed, but competing proposals on how to involve the private sector and avoid triggering a Greek default have been circulating.
Sources told Reuters on Thursday that a proposal for a banking tax to cover the cost of the bailout had been ruled out.
Market players said with the market now short ahead of the summit, there was potential for the euro to get a better bid in reaction to any news of progress from the summit, but the euro remained vulnerable to a selloff if the details failed to convince investors.
"Anything that comes out needs to be really convincing to limit the risk of contagion to Italy and Spain which has materialized in the last few weeks," said Derek Halpenny, currency strategist at Bank of Tokyo-Mitsubishi UFJ.
Traders also pointed to worse-than-forecast purchasing managers' surveys for Germany and the euro zone as a whole as weighing on the single currency.
The euro slumped against the safe-haven Japanese yen, giving up earlier gains to trade 0.2 percent lower at 111.74 yen and also slipped 0.1 percent to 1.1639 Swiss francs.
U.S. Debt, China Concerns
The dollar climbed as the euro struggled, with the dollar index up 0.3 percent at 75.051 .DXY.
In recent sessions the greenback has suffered on uncertainty ahead of an August 2 deadline for raising the U.S. public debt ceiling and the threat of a downgrade to the United States' triple-A credit rating in the event of even a brief default.
The White House signaled it could support a short-term increase in the U.S. borrowing limit for "a few days" if lawmakers agreed to a broad deficit reduction deal but needed more time to pass it.
Philadelphia Federal Reserve Bank President Charles Plosser told Reuters on Wednesday that the Fed was actively preparing for the possibility that the United States could default.
Commodity currency the Australian dollar dipped 0.4 percent to $1.0699 amid the bout of risk aversion, compounding losses sustained after a survey of manufacturers' showed activity in China's manufacturing sector shrank for the first time in a year in July.
The HSBC flash purchasing managers index for China helped dent the New Zealand dollar, which was down 0.1 percent on the day at US$0.8557 after having earlier powered to a fresh 30-year peak at US$0.8588.
[Source: By Nia Williams, Reuters, London, 21Jul11]
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