Monday November 8, 2010 - 23:42:12 GMT
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Reuters - www.reuters.com
FOREX-Euro slips as euro zone debt prompts fret
FOREX-Euro slips as euro zone debt prompts fret
* Euro down as worries resurface about Ireland
* Peripheral yield spreads widen; weak German data weighs
* Friday's robust U.S. jobs numbers support dollar (Updates prices; adds comment, details)
By Julie Haviv
NEW YORK, Nov 8 (Reuters) - The euro fell against the U.S. dollar for a second straight session on Monday as budget problems in Ireland and euro zone debt issues prompted investors to seek safety in the greenback.
The euro, which fell Friday after a stronger-than-expected U.S. jobs report, extended losses Monday on Europe's sovereign debt concerns.
The dollar had slipped to a 9-1/2-month low against the euro after the Federal Reserve last Wednesday said it would buy $600 billion of Treasuries by mid-2011 to lower interest rates and reinvigorate a sluggish economy.
The euro was last down 0.8 percent at $1.3917 EUR=, and traders said a break through support around $1.3860, its low so far this month, could trigger a near-term move toward $1.37. It also fell 0.9 percent to 112.95 yen EURJPY=.
"Fears are escalating over sovereign debt issues in the euro zone, and the euro breaking below $1.40 is a substantial move," said Camilla Sutton, currency strategist at Scotia Capital in Toronto, Canada.
"Having said that, I believe the euro's weakness is only a temporary move and we will revert back to dollar weakness," she said. Fed easing "will continue to put downward pressure on the dollar into the year end as well as next year."
The shape of the U.S. Treasury yield curve, meanwhile, is depicting concern over long-term U.S. dollar value, Sutton added.
The U.S. Treasury yield curve steepened to record levels early on Monday amid continued fallout from the Federal Reserve's plan to extend its bond buying program.
But profit-taking eventually turned longer-dated debt prices positive and narrowed the yield gap between long bonds and 10-year Treasury notes. For details, see [ID:nN08214066]
The steepness of the yield curve speaks to the longer-term risks inherent in Fed easing and the building unattractiveness of U.S. dollar denominated assets, she said.
For now, though, markets were focused on debt problems in Ireland. Although the government is funded until early 2011, an Irish newspaper report questioned the government's ability to cut spending next year, casting doubt on future demand for Irish debt.
The cost of protecting Irish government debt against default rose on Monday as did equivalent insurance for Spain.
China said over the weekend it would help Portugal, another euro zone country with strained public finances, cope with the crisis, but made no promises about buying Portuguese government bonds. China has promised to buy Greek bonds in the future.
Weak German industrial output data also hurt the euro, while a general move away from risk weakened the Australian dollar, which fell 0.3 percent to $1.0129 AUD=D4, off Friday's 28-year peak of $1.0183. The New Zealand dollar fell 1.1 percent to $0.7876 NZD=D4.
The U.S. dollar was last down 0.1 percent at 81.16 yen JPY=.
G20, IRELAND MAY ADD DRAMA
Analysts said European debt fears also provided an opportunity to trim bets against the dollar, which remained at an elevated level in the latest week. [IMM/FX]
Beyond short-covering, the dollar faces an uphill climb against most major currencies and emerging market currencies.
While recent jobs data was surprisingly strong, analysts said the economy has yet to show it can sustain such strength.
Sutton expects the euro to reach $1.43 at year-end.
The Fed's decision to pump more money into the U.S. economy has certainly irked developing and some developed countries who fear the money will stoke inflation outside U.S. borders. Germany's finance minister called U.S. monetary policy "clueless." [ID:nSGE6A706T]
The issue will probably feature at a Group of 20 meeting in Seoul this week that may address global economic imbalances.
But if worries about euro zone debt issues mount, Michael Woolfolk, strategist at BNY Mellon in New York, said it could be a repeat of events last November, when debt worries in Dubai and Greece sparked a safe-haven rush into dollars.
"Last year, people closed their books early, took profits, and bought dollars," he said. "This year, Ireland suggests there is still smoke emanating from the European sovereign debt crisis, and if it turns into a fire, it's quite possible that the overbought euro will suffer again."
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