[h=3]By William Kemble-Diaz[/h]The euro steadied against the dollar in thin European trade Tuesday but slipped against commodity-linked currencies such as the Australian dollar as investors absorbed a flurry of mixed policy signals on Cyprus and hunkered down ahead of a long weekend.
Having sent markets into a tizzy late Monday, Jeroen Dijsselbloem, head of the Eurogroup of euro-zone finance ministers, backtracked on his earlier comments that Cyprus' stinging bailout would serve as a template for future bank rescues. European Central Bank Executive Board member Benoit Coeure said Mr. Dijsselbloem had been wrong to suggest Cyprus, where some large depositors could lose as much as 40% of their savings, was a model for the rest of the region.
That helped the euro to sustain its mild overnight recovery against the buck after the single currency on Monday touched a four-month low of $1.2830. But with the Cypriot shock still reverberating and Italy without a government, support for the euro remained fragile as it lost ground to the Australian, Canadian and New Zealand dollars.
Against the Aussie dollar the euro fell to as low as A$1.2261, its weakest level since Nov. 20.
Currency strategists said the fallout from Cyprus and Italy, where the first efforts to form a government have finally begun after last month's inconclusive elections, will remain manageable as long as the ECB's commitment to buy fiscally frail sovereign bonds provides a credible backstop to the financial turmoil. That was underlined by news Italy sold 8.5 billion ($11.02 billion) in six-month Treasury bills at a lower funding cost than the previous month.
But with the euro-zone economy struggling to escape five straight quarters of recession and the U.S. economy picking up, some said further euro losses against the dollar were likely, eventually.
"It will likely be a drawn out process of poor economic data over a long period of time that sees the euro weaken," said Kit Juckes, a currency strategist at Societe Generale. "There's some execution risk around the bailout in Cyprus, there's political risk in Italy but there's a drip-drip of economic divergence between Europe and the U.S. and it is that that will eventually drive the euro down," he said.
The yen was broadly steady after strengthening in Asian trade on expectations Japanese exporters will ramp up their repatriation of overseas profits before the country's fiscal year ends later this week.
Underlying support for the Japanese currency remains fragile due to the government's stated aim to end decades of deflation after its landslide election win in December. The Bank of Japan holds its first policy meeting April 3-4 under new governor Haruhiko Kuroda, who is expected to enact bold easing measures to help meet a 2% inflation target.
The Turkish lira was steady with the country's central bank expected by economists to keep its interest rates unchanged at 1200 GMT and possibly looking to raise its reserve requirement ratios modestly in an attempt to curb credit growth.
The Hungarian forint was a touch firmer ahead of a rate decision at 1300 GMT. The market consensus is for a quarter-point cut in the policy rate to a record low of 5%.
At 1148 GMT, the euro was trading at $1.2860 against the dollar, compared with $1.2854 late Monday in New York, according to trading system EBS. The dollar was at ¥94.31 against the yen, compared with ¥94.21, while the euro was at ¥121.30 compared with ¥121.07. The pound was trading at $1.5155 against the dollar, compared with $1.5178 late Monday in New York.
The Wall Street Journal Dollar Index, which measures the dollar against a basket of currencies, was at 73.477 from 73.477.
Write to William Kemble-Diaz at [email protected]
Having sent markets into a tizzy late Monday, Jeroen Dijsselbloem, head of the Eurogroup of euro-zone finance ministers, backtracked on his earlier comments that Cyprus' stinging bailout would serve as a template for future bank rescues. European Central Bank Executive Board member Benoit Coeure said Mr. Dijsselbloem had been wrong to suggest Cyprus, where some large depositors could lose as much as 40% of their savings, was a model for the rest of the region.
That helped the euro to sustain its mild overnight recovery against the buck after the single currency on Monday touched a four-month low of $1.2830. But with the Cypriot shock still reverberating and Italy without a government, support for the euro remained fragile as it lost ground to the Australian, Canadian and New Zealand dollars.
Against the Aussie dollar the euro fell to as low as A$1.2261, its weakest level since Nov. 20.
Currency strategists said the fallout from Cyprus and Italy, where the first efforts to form a government have finally begun after last month's inconclusive elections, will remain manageable as long as the ECB's commitment to buy fiscally frail sovereign bonds provides a credible backstop to the financial turmoil. That was underlined by news Italy sold 8.5 billion ($11.02 billion) in six-month Treasury bills at a lower funding cost than the previous month.
But with the euro-zone economy struggling to escape five straight quarters of recession and the U.S. economy picking up, some said further euro losses against the dollar were likely, eventually.
"It will likely be a drawn out process of poor economic data over a long period of time that sees the euro weaken," said Kit Juckes, a currency strategist at Societe Generale. "There's some execution risk around the bailout in Cyprus, there's political risk in Italy but there's a drip-drip of economic divergence between Europe and the U.S. and it is that that will eventually drive the euro down," he said.
The yen was broadly steady after strengthening in Asian trade on expectations Japanese exporters will ramp up their repatriation of overseas profits before the country's fiscal year ends later this week.
Underlying support for the Japanese currency remains fragile due to the government's stated aim to end decades of deflation after its landslide election win in December. The Bank of Japan holds its first policy meeting April 3-4 under new governor Haruhiko Kuroda, who is expected to enact bold easing measures to help meet a 2% inflation target.
The Turkish lira was steady with the country's central bank expected by economists to keep its interest rates unchanged at 1200 GMT and possibly looking to raise its reserve requirement ratios modestly in an attempt to curb credit growth.
The Hungarian forint was a touch firmer ahead of a rate decision at 1300 GMT. The market consensus is for a quarter-point cut in the policy rate to a record low of 5%.
At 1148 GMT, the euro was trading at $1.2860 against the dollar, compared with $1.2854 late Monday in New York, according to trading system EBS. The dollar was at ¥94.31 against the yen, compared with ¥94.21, while the euro was at ¥121.30 compared with ¥121.07. The pound was trading at $1.5155 against the dollar, compared with $1.5178 late Monday in New York.
The Wall Street Journal Dollar Index, which measures the dollar against a basket of currencies, was at 73.477 from 73.477.
Write to William Kemble-Diaz at [email protected]