* German manufacturing PMI, Ifo surveys weak, weigh on euro
* Concerns of potential Greek exit add to bearish outlook
* Break below $1.25 could see move towards 2010 low
NEW YORK, May 24 (Reuters) – The euro hovered just above a
two-year low in volatile trade against the dollar on Thursday
as investors consolidated bearish positions on the common
currency ahead of a long U.S. holiday weekend amid fears of
Greece’s possible exit from the euro zone.
Dour German manufacturing data on Thursday was a reminder
that no country in the region was immune from the region’s debt
crisis and further unnerved investors already worried not only
about Greece but also by the risk that other indebted countries
such as Spain could exit the regional bloc or default on debts.
Paul Dietrich, chief executive officer at Foxhall Capital
Management in Orange, Connecticut said, however, that Greece’s
problems have already been priced in by the market.
“What investors are worried about is a banking crisis in
Europe. Mainly they are looking at who is the next one to exit,”
said Dietrich. “If Spain starts looking likely that it could
leave the European Union or default on its debt, then you’re
going to see a major banking crisis in Europe because European
banks hold massive amounts of Spanish debt.”
Dietrich has retained a defensive stance in his portfolio,
with 70 percent of holdings in short-term U.S. Treasuries.
The unexpectedly weak Ifo business climate index and
manufacturing PMI data for May suggested that the growth in
Europe’s largest economy that had helped the euro zone dodge
recession may be starting to slow.
Signs of a downturn across the region, along with banking
sector problems in Spain and the risk of contagion ensnaring
bigger economies are combining to keep euro bears firmly in
control, with some investors targeting $1.20 in coming weeks.
The euro dropped to $1.2514, according to Reuters
data, its lowest since July 2010, before recovering to hit
session highs at $1.2619 as some investors booked profits on
bearish positions.
The euro was last at $1.2536, down 0.4 percent. Traders
reported an options barrier at $1.2500 with more stop-loss
orders cited at $1.2480.
Bob Lynch, chief currency strategist at HSBC in New York did
acknowledge some positive signals on the euro/dollar chart which
flagged a near-term bounce.
“But even if such corrective gains do materialize, the
current dynamics in the market – the negative sentiment toward
the euro zone and increasing pessimism about that region and
global growth – suggest they will more likely be used as selling
opportunities,” Lynch said.
In the options market, the euro’s decline to two-year lows
against the dollar pushed one-month at-the-money implied
volatility to 13.13 percent, its highest in more than four
months on Thursday before slipping to 12 percent.
Meanwhile, the cost of protecting against a further euro
decline continued its rise, to 2.525 percent,
approaching multi-month peaks hit last Monday.
The euro also looked technically weak after price action
revealed a “death cross” where the shorter-term 50-day simple
moving average at $1.3084 dropped below the longer-term term
100-day SMA, currently at $1.3092. Technical analysts warn such
events signal further price weakness.
But gains in the euro versus the Swiss franc did help stem
some of the euro’s losses against the dollar, traders said.
The euro earlier jumped to 1.2075 francs, its
highest since late March on market talk the Swiss government is
going to impose tax on deposits, traders said. By mid-afternoon
New York trade, the euro was at 1.2014 francs, up 0.1 percent on
the day.
The euro has lost 1.9 percent against the dollar so far this
week with sentiment already fragile after a European Union
leaders summit on Wednesday failed to shed light on how they
might tackle the euro zone debt crisis.
Real money investors and macro funds have stepped up selling
the euro in recent days as concerns Greece might quit the euro
zone intensified. Fears of a Greek exit have mounted after an
inconclusive election this month left the country on the path to
bankruptcy and raised the risk of contagion.
Greeks will vote again on June 17, with polls showing a
neck-and-neck race between parties supporting and opposing terms
of the country’s international bailout, keeping markets on edge.
BROAD DOLLAR STRENGTH
European Central Bank data showed 35.4 billion euros of net
direct portfolio investment flowed out of the euro zone in
March, suggesting investors are starting to shun the region’s
assets.
The safe-haven dollar and yen were the beneficiaries of the
flows out of Europe, with the euro down 0.3 percent at 99.75 yen
, having fallen to 99.33 yen, its lowest since Feb. 1.
The greenback rose to a 15-month peak versus the Swiss franc
of 0.9595 francs.
The greenback rose 0.1 percent to 79.54 yen, with a session
peak at 76.56, showing limited reaction to Bank of Japan
governor Masaaki Shirakawa saying the central bank was resolved
to maintain its ultra-loose monetary policy but would not ease
solely to weaken the yen.
