Euro slips after Spanish takes over lender

LONDON - The euro fell broadly on Monday, pulling back from a short-covering rally after the Spanish central bank’s takeover of a savings bank underlined structural problems facing fiscally fragile euro zone states.

By (Reuters)

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Published: Mon 24 May 2010, 5:48 PM

Last updated: Thu 2 Apr 2015, 9:47 AM

The euro was on the back foot after the Bank of Spain said on Saturday it had taken over the running of CajaSur following the failure of its planned merger with another regional lender.

The move highlighted the weakness of the banking sectors of some euro zone members, which are already suffering from fiscal problems and struggling to bring down their budget deficits.

Spain’s largest workers union said on Monday the country was heading for a general strike in protest at the government’s austerity measures, although it preferred not to call one.

Analysts said short covering in the euro had petered out as investors remained negative on the currency, and that it was vulnerable to selling on any hint of weakness in the euro zone. “The euro’s short squeeze isn’t sustainable,” said Chris Turner, head of currency strategy at ING. “The market is waiting for the next negative news from the euro zone to sell the euro.”

The euro fell around 1.3 percent on the day to as low as around $1.2407, before pulling back to around $1.2418 by 0932 GMT. It also fell 1 percent against the yen.

Traders said its losses were accelerated after stop-loss orders were triggered under $1.2480. European banks and Asian central banks were also seen selling the euro in quiet trade, with many European markets on holiday.

More euro losses

The euro has retreated from $1.2670 hit on Friday. It rallied last week as investors exited extreme short positions in the single currency, in part due to fears of intervention to prop up the euro after its dramatic decline in past weeks.

Still, analysts said signs of more cracks in Spain’s banking sector might crank up negative sentiment and push the euro down.

“One bank bailout in Spain is not a problem, but if that number was to (grow), we could see renewed pressure on the euro,” said Elsa Lignos, currency strategist at RBC.

Commodities Futures Trading Commission data shows IMM speculators had by early last week cut back slightly on record bets the single European currency will weaken.

Those positions have ballooned in past months, pushing the euro as low as $1.2143 early last week against the backdrop of Greece’s debt crisis, which has threatened to spread to Spain and Portugal and raised concerns about the euro’s stability.

The euro has recovered from that trough as intense risk aversion has made investors nervous about holding excessive positions both in favour of or against the currency, but analysts see more losses down the line.

Liquidity has dried up, leaving investors scrambling for safe-haven dollars. This helped to boost the dollar roughly 1 percent against a currency basket to 86.133 on Monday.

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