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FOREX-Euro slides as sovereign debt jitters spread

Published 07/11/2011, 01:53 AM
Updated 07/11/2011, 01:56 AM

* Euro under pressure on worries about debt crisis spreading

* European officials holding emergency meeting on Monday

* Euro/Aussie hovers near support at 1.3220

* Euro/Swiss dips back close to record low hit in June

* Disappointing U.S. data weigh on risk trade (Updates levels, adds comments)

By Ian Chua and Masayuki Kitano

SYDNEY/SINGAPORE, July 11 (Reuters) - The euro fell back close to a record low versus the Swiss franc and hovered near chart support versus the Australian dollar on Monday, hurt by renewed jitters over the euro zone's debt crisis ahead of an emergency meeting of European officials.

The euro fell following news over the weekend that European Council President Herman Van Rompuy had called an emergency meeting of top officials dealing with the euro zone debt crisis for Monday morning, reflecting concern that the crisis could spread to Italy.

A Financial Times report saying some EU leaders were considering allowing a selective default by Athens, to put its debt on a more sustainable footing, also dented the single currency, traders said.

Such news added to the euro's woes, which took a hit on Friday when Italian bond yields soared to euro lifetime highs, raising fears that Italy, with the highest sovereign debt ratio relative to its economy in the euro zone after Greece, could be next to suffer in the crisis.

"Risk aversion among investors may rise on the concerns over Europe, at least temporarily, and cause the euro to underperform in the near-term," said Junya Tanase, chief FX strategist for JPMorgan Chase Bank in Tokyo.

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Events to watch for this week include the results of stress tests of European banks that will be released on July 15 as well as Monday's emergency meeting, Tanase said.

The euro slid 0.6 percent to $1.4182 and fell 0.4 percent against the Swiss franc to 1.1890 , nearing a record low of 1.1808 hit in late June on trading platform EBS.

Traders said further upside in the Swiss franc was likely after the chairman of the Swiss National Bank was quoted on Sunday as saying there was no reason to curb the currency's strength at the moment as price stability was not yet under threat.

Against the dollar, one support for the euro lies near $1.4155, trendline support drawn off the euro's May trough just below $1.40 and its June 27 low near $1.41.

"But the news over the weekend could trigger a significant move to the downside in the euro, by the time we get through this week," warned Greg Gibbs, strategist at RBS in Sydney.

Gibbs said he could see the euro fall towards $1.3500 over time given the severe deterioration in the peripheral euro zone sovereign debt markets.

The euro was testing support on the crosses, with euro/Aussie easing 0.1 percent to 1.3240 , near support at 1.3220, a trough hit on May 11 and again on Friday. A drop below there would take euro/Aussie down to a six-month low.

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DOLLAR INDEX ABOVE TRENDLINE

Renewed pressure in the euro helped lift the dollar against a basket of major currencies. The dollar index rose to 75.451, up from Friday's low at 74.843.

The dollar index has climbed back above trendline resistance drawn off a peak hit in June 2011. The dollar index faces more resistance at its mid-June peak of 76.015. A clear breach of such resistance could set the dollar index up for further gains.

Euro zone worries and disappointing U.S. data weighed on risk appetite, knocking commodity currencies lower. The Australian dollar fell 0.4 percent to $1.0707.

There was little reaction to Australia's carbon tax package unveiled on Sunday, which the country's treasurer said would be budget neutral and not affect the government's aim to bring the budget back to surplus in fiscal year 2012/13.

"There may be some damage to consumer and business confidence in the near term, now that the affected groups are able to pinpoint the precise impact on their budgets," said Stephen Walters, JPMorgan chief economist.

"On the flip side, though, removal of some of the policy uncertainty could mitigate against some of the negative impact, assuming government representatives do a decent job of selling it over the next few weeks."

Data last Friday showed U.S. jobs growth nearly halted in June, adding to concerns about the health of the world's biggest economy.

The dismal jobs report was also seen complicating efforts to avert a looming U.S. debt default. President Barack Obama and congressional leaders of both parties were in high-stakes talks to break the impasse over raising the debt ceiling.

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The dollar stood at 80.76 yen , up 0.2 percent from late U.S. trade on Friday, supported by bids from Japanese importers, but remained below Friday's five-week high around 81.50 yen. (Additional reporting by Reuters FX analyst Krishna Kumar in Sydney, and Chikafumi Hodo in Tokyo; Editing by Richard Borsuk)

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