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Euro drops broadly on anti-austerity votes

NEW YORK - The euro dropped broadly on Monday after elections in Greece and France cast doubt on politicians’ commitment to austerity plans aimed at tackling the euro zone debt crisis.

Renewed worries about the stability of the euro zone made the euro pierce the key psychological level of $1.30 on its way to hitting a three-month low against the dollar.

The euro also fell to its lowest in 3-1/2 years against the British pound and a 2-1/2 month trough versus the yen, but trade in the overnight session was quiet due to a UK holiday.

The biggest blow to the common currency was the Greek election, in which the two main parties that support the nation’s international bailout failed to secure a parliamentary majority. This threw into question the future of the program and potentially the country’s membership in the euro.

In early New York trade the euro rebounded from session lows, with strong support around $1.2955, the 61.8 percent retracement of the euro’s rally from its January low to a high in February.

“There is a lot of technical support at that level, so the market has calmed down a bit,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

In France, Socialist Francois Hollande, who has pledged to balance the budget but more slowly than his opponent, ousted centre-right incumbent Nicolas Sarkozy. The result could trigger a push-back against German-led austerity across the euro zone.

“Clearly damage has been done by this weekend’s political developments and euro support should dissipate in the days ahead,” Esiner said. “The euro will likely drop below $1.30 again and find a new range, perhaps between $1.26 to $1.28.”

The euro sank to a session low of $1.2955, breaking the $1.30 to $1.35 range it has been trapped in since late January. It was last down 0.3 percent at $1.3046.

Uncertainty about the euro has grown over the past week as evident in the options market, with three-month euro/dollar risk reversals trading at -2.6 vols, unchanged from the previous session but up from -2.250 vols a week earlier.

“The reaction in the foreign exchange market shows if it really comes to the point where it’s clear European politicians will step back from austerity measures, that will be perceived as very negative by financial markets,” said Lutz Karpowitz, currency analyst at Commerzbank.

“In Greece it’s maybe the worst outcome we could have had there. It looks impossible to find a government that will be in favor of austerity.”

The euro fell to 80.37 pence against the pound, a level last seen in November 2008 after the Lehman Brothers collapse. The common currency hit 103.23 yen, its lowest since mid-February.

The U.S. dollar was up 0.1 percent at 79.92 yen, having fallen back below 80 yen, seen as a support, on Friday after disappointing U.S. jobs numbers.