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FOREX-Euro slumps vs Swiss franc as Greece worries grow

Published 06/16/2011, 08:23 AM
Updated 06/16/2011, 08:28 AM
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* Euro hits all-time low vs Swiss franc, falls broadly

* Greek debt turmoil deepens, PM tries to salvage government

* Some fund managers trim risk plays, plan to add later

(Adds comment, details, updates throughout)

By Naomi Tajitsu

LONDON, June 16 (Reuters) - The euro tumbled broadly on Thursday, hitting a record low against the Swiss franc, and was poised for further losses as investors sought safe-haven assets on concerns Greece's problems were spiralling out of control.

Selling in the euro accelerated, sending it to a three-week low versus the dollar and leaving it on course to drop below $1.40 as yields on weaker euro zone bonds surged, expanding their spreads against German Bunds to their widest ever. [GVD/EUR]

Violent protests in Athens against government austerity highlighted the political obstacles to a second bailout, with Prime Minister George Papandreou forced to reshuffle his cabinet to salvage his government after resignations by ruling party lawmakers. [ID:nL3E7HG0P8]

Adding to negative euro sentiment were comments from European Central Bank policymaker Nout Wellink, who was quoted by a Dutch newspaper as saying the European bailout fund should be doubled. [ID:nLDE75F03M]

"The risk is increasing that Greece may not get a bailout, and this is putting pressure on the euro," said Lutz Karpowitz, currency strategist at Commerzbank in Frankfurt.

The euro dropped below 1.20 Swiss francs to plumb a lifetime low of 1.1957 francs on electronic trading platform EBS, falling one percent on the day.

Seen as a safe-haven currency, the franc brushed off statements by the Swiss National Bank expressing concern about its gains, as the bank gave no sign of action that would stem the currency's upside. [ID:nZCHFHE79L]

Against the dollar, the euro fell 0.6 percent to a session low of $1.4073, its lowest since late May.

It broke below support around $1.4150, its 100-day moving average. A close below that level would offer a technical indication that the euro was vulnerable to more losses, and analysts said the single currency was poised for a move down to May's trough of $1.3970.

"There's a strong possibility of the euro breaking below $1.40 and the best way to play euro/dollar right now is to sell into any strength," said Neil Mellor, currency strategist at Bank of New York Mellon.

A ramp-up in uncertainty about the Greek debt situation drove euro/dollar implied volatilities higher, with one-month volatility jumping to around 14.0 percent , its highest since November and indicating that movements in the single currency may become more erratic.

The premium paid to protect against euro selling has also surged, with the one-month euro/dollar 25-delta risk reversal cranking up 1.0 vol to trade around 3.1 in favour of euro puts, its highest since late May 2010. This indicates a growing euro downside position in the options market.

BANKING STRAINS?

The euro's fall supported the dollar against a basket of currencies, pushing the dollar index <.DXY> up around 0.4 percent to a high of 75.938.

U.S. data due on Thursday includes weekly jobless claims, housing starts and the Philadelphia Fed business index. The yen also rose due to its perceived safe-haven status, pushing the dollar down 0.4 percent to 80.70 yen and the euro to a one-month low of 113.50 yen.

Investors are increasingly unsure whether an agreement on a Greek bailout plan will be reached in the near term. EU and banking sources told Reuters Germany wants the deadline for a second rescue deal to be pushed back to September, highlighting the hurdles towards reaching a consensus. [ID:nLDE75F0WQ]

Concerns about possible strains in the banking sector due to Greece's debt problems are raising speculation that European banks could face difficulties in dollar funding.

The one-year euro/dollar currency basis swap spread, the cost of swapping euro into dollar for a year, widened to around 37 basis points according to Reuters data, the widest since February, from around 23 basis points on Wednesday.

Some fund managers said they had recently pared their risky positions as the Greek debt situation deteriorates while economic data suggests the global economy may be struggling.

"We've been taking risk off across the board," said Thanos Papasavvas, head of FX management at Investec, adding that he had been "lightly" selling euros and sterling, while sitting tight on his emerging currency positions.

He acknowledged the latest escalation in investor jitters about Greece may push the euro below $1.40 in the near term, but said he was optimistic Greece would form a stable government and implement the austerity required for it to receive more aid.

He said he was interested in increasing his risk holdings later in the year, particularly when signs emerge that the global economic recovery is picking up steam.

(Additional reporting by Jessica Mortimer; Editing by Ruth Pitchford)

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