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FOREX-Euro breaks support vs dollar, more losses seen

ForexDec 20, 2010 12:40PM ET
 

* Euro falls to record lows vs Swiss francs, Aussie dollar

* Euro zone debt uncertainty, downgrades stay in focus

* Speculators trim bets against euro in latest week (Adds quote, updates prices)

By Wanfeng Zhou

NEW YORK, Dec 20 (Reuters) - The euro fell against the dollar and hit a record low versus the Swiss franc on Monday, with more losses likely as markets were hit by fears of further ratings downgrades of debt-stricken euro zone countries and banks.

Moody's Investors service said on Monday it may cut the ratings on some Spanish banks following its multi-notch downgrade of Ireland's credit rating last week. Speculation has risen that France and Belgium may also face possible cuts.

The euro broke below its 200-day moving average around $1.3102, usually a bearish signal. The next downside target is $1.30, followed by the December low of $1.2970, traders said.

"Credit ratings are eroding across much of the common currency zone as debt continues to increase and economic growth remains anemic," said Karl Schamotta, senior market strategist at Western Union Business Solutions, in Victoria, British Columbia.

"As ratings decline, countries have greater difficulty borrowing on international markets and interest rates are consequently forced upward," he added.

The euro slipped 0.5 percent to $1.3116, having dropped as low as $1.3094 on trading platform EBS, its lowest since Dec. 2. The euro also fell below its 200-day moving average against the dollar in late November, but it climbed back above it shortly thereafter.

The cost of insuring French sovereign debt against default rose to a record high on Monday, according to data monitor Markit. For more, see [ID:nLDE6BJ1G1]

The euro fell to 1.2636 Swiss francs on EBS, its weakest since the euro's launch in 1999, with the Swiss currency benefiting from its safe-haven status. The euro also hit a record low against the Australian dollar .

The dollar index <.DXY> rose to 80.616, having been underpinned in Asia on safe-haven flows due to renewed tensions on the Korean peninsula. [ID:nL3E6NK01M]

Against the yen, the dollar eased 0.3 percent to 83.75 , weighed by Japanese corporate selling and as U.S. bond yields fell.

'SERIOUS CONCERNS'

Analysts said the euro will likely continue to struggle until European officials clarify how they will address funding and liquidity problems in the region's troubled economies.

The European Central Bank expressed "serious concerns" that Ireland's bailout package could affect the institution's liquidity operations in the euro zone. See [ID:nLDE6BI0HC]

European Union leaders agreed last week to set up a permanent crisis management mechanism from mid-2013, disappointing investors who had hoped for more active measures such as expanding the European Financial Stability Facility or issuing joint European sovereign bonds, so-called E-bonds.

"Officials' inability to get ahead of the curve in dealing with the continent's debt crisis remains a key liability for the euro and likely one that will keep it vulnerable well into 2011," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

UBS flow data showed real money, or unleveraged, accounts led the euro selling last week, followed by leveraged names and corporates.

"The cumulative effect of these sustained outflows has been to send euro positioning deep into net short territory. Euro shorts are now more extensive than for any other G10 currency we monitor," the firm said in a note.

The latest FX positioning data showed speculators continued to hold a net short position in the euro last week, although net shorts were trimmed from the previous week. Net longs in the Swiss franc increased. See [ID:nN17169607] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on IMM FX positioning http://r.reuters.com/kus26k

The euro could fall to 1.20 Swiss francs in 2011, Morgan Stanley said. "Switzerland contrasts sharply with the Eurozone and remains perfectly poised to benefit from any increased sovereign stress concerns in the euro zone," the firm said. (Editing by Dan Grebler)

FOREX-Euro breaks support vs dollar, more losses seen
 

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