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Euro licks wounds near 3-week low as debt woes deepen

TOKYO- The euro hovered near a three-week low on Thursday and looked vulnerable to worries that Greece’s debt crisis may be getting out of control, as a new bailout scheme to keep Greece from defaulting remained elusive while Greek protests against austerity turned violent in Athens.

This saw the yield spread of 10-year Greek government bonds versus benchmark German Bunds blow out to a euro lifetime high and fears about contagion also drove equivalent Portuguese and Irish spreads to euro era record levels.

“Investors are getting worried that policymakers can’t agree on measures for Greece. Even though the Greek economy accounts for only a small part of the euro zone economy, it could affect the whole European financial system if it is considered to be in default,” said Kimihiko Tomita, forex manager at State Street.

The euro stood at $1.4189 , having fallen to $1.4156 in late US trade on Wednesday, which was a low not seen since May 27.

A Japanese bank trader said buying from an Asian sovereign account, a regular euro buyer as it converts part of rising forex reserves to euros, helped the euro stay afloat in Asia.

Immediate support is seen at $1.4152, the 100-day moving average, and then $1.4140, the 76.4 percent retracement of the May 23-June 7 rally.

But a break below those levels would bring it in sight $1.4124, the 78.6 percent Fibonacci support, before a return to the May 23 low around $1.3967 — a scenario that many traders think is probable.

“Based on our monitoring of institutional investors, institutional investors are still very long in the euro. So there’s a chance that more euro unwinding could be kicking in,” Tomita added.

As the euro sags, the dollar index .DXY> held near a three-week high after having jumped 1.7 percent on Wednesday — its biggest one-day percentage gain since August 2010. It last traded at 75.489, within a whisker from a three-week high at 75.659 hit on Wednesday.

The dollar also held firm against safe-haven currencies like the Swiss franc and yen. It kept Wednesday’s hefty gains and traded at 0.8540 francs , putting further distance from a record low near 0.8320 set earlier in the month.

For the Swiss franc, the focus is on the Swiss National Bank, which is expected to keep rates on hold at 0.25 percent on Thursday. Traders are looking to comments from the bank on the recent strength of the franc.

Analysts expect the bank to raise rates by 25 basis points in September and again in December but the SNB has been wary of raising its target for the 3-month Swiss franc LIBOR, for fear of pushing the franc up still further against the euro and the dollar. ⅛ID:nL9E7F6040⅜

Against the yen, the dollar flirted with a two-week high of 81.06 yen it hit on Wednesday, with many players looking to whether it can stay above 80.89 yen, the base of the Ichimoku cloud.

The dollar looked to be benefiting from a rush to Treasuries, where 10-year yields dived to 2.97 percent in the biggest daily drop in a year.

Commodity currencies like the Australian dollar also lost ground to the US dollar, though they fared better elsewhere.

Even hawkish comments from the Reserve Bank of Australia on Wednesday provided little support for the Aussie dollar , which shed nearly two cents to a low of $1.0535 from Wednesday’s session high of $1.0715. It last traded at $1.0582.