Monday, July 18, 2011

Euro struggles debt crisis buoys Swiss franc

Euro struggles; debt crisis buoys Swiss franc
* Euro falls on market uncertainty ahead of EU summit

* Safe-haven Swiss franc hits record high vs euro, dollar

* U.S. debt ceiling saga adds to investor unease

By Neal Armstrong

LONDON, July 18 (Reuters) - The euro fell on Monday, hitting
a record low against the Swiss franc and dropping against the
yen as investors grabbed perceived safe-haven currencies on
concerns that the euro zone debt crisis could worsen in the near

The dollar also hit a record low against the Swiss franc as
wrangling in the U.S. Congress over the country's debt ceiling
dragged on.

Italian and Spanish 10-year bond yields rose sharply while
the cost of insuring peripheral euro zone debt against default
soared to record highs as contagion risks and concerns over
policymakers' failure to quickly resolve the region's debt
crisis dragged the euro lower.

European bank stress test results released on Friday did
little to calm jitters, and attention is shifting to Thursday's
emergency meeting of EU leaders, when a second bailout package
for Greece will be under discussion.

German Chancellor Angela Merkel called on Sunday for private
investors to make a major contribution to bailing out Greece.
Officials proposed a range of schemes for the European Financial
Stability Facility to finance a buy-back or a swap in which
private owners of Greek government bonds would accept cuts in
the face value of their holdings.

But the ECB is holding out against any step that would
trigger a default.

Any clarity over a second bailout for Greece may bring only
temporary relief for the euro if investors decide the single
currency area's problems have become systemic and require a
region-wide solution.

"It seems like a vicious circle with Germany's Merkel not
budging on private sector involvement and the ratings agencies
saying private involvement would constitute a selective
default," said Tom Levinson, currency analyst at ING.

"With ECB (president) Trichet seeing no way defaulted debt
could be used as collateral, it's difficult to see the cycle
being broken at the moment."

The euro fell sharply against the Swiss franc early in the
Asian trading day to change hands at a record low of 1.1365
, according to dealers, down from 1.1501 late in New
York on Friday.

The pair bounced to 1.1475 francs in European dealing,
helped by German bank buying, but was still down 0.5 percent for
the day. Traders said the franc's rise in Asian trade may have
been exacerbated by thin conditions owing to a Japanese holiday.

The franc continues to be the G10 currency of choice for
investors and traders seeking liquidity and relative safety from
concerns that the euro zone's sovereign debt crisis could spread
to countries such as Spain and Italy.

Euro/Swiss one-month implied volatilities climbed with the
near term rising at a faster pace and the curve getting more
inverted. One-month euro/Swiss rose to 13.9 percent
from 13.2 percent on Friday, while one-week implied vols
advanced to 15 percent.

Euro/Swiss one-month risk reversals also
reflected a downside bias for the euro.

"Markets are expecting a drastic move in the short term and
spot to go lower at least until the European Union summit on
Thursday," said Olivier Korber, analyst at Societe Generale.

The euro was down 0.8 percent versus the dollar on the day
at $1.4040 , off an earlier low of $1.40145. Technical
analysts said next support was the 200-day moving average around
$1.3912. The euro fell over one percent against the low-yielding
yen to 110.66 yen and last traded around 111.03 yen.


The dollar also fell to a record low of 0.8034 francs
on EBS. It rebounded to 0.8171 as some dealers covered their
short positions, but with the U.S. grappling with its own
troubles with debt, any bounce in the greenback is likely to
prove fleeting, traders said.

Political negotiations over the U.S. debt ceiling are
running dangerously close to an Aug. 2 deadline after which
Washington will be unable to pay its bills.

Republican and Democratic senators sought on Sunday to craft
a plan that could avert a government debt default should the
talks remain in stalemate.

Even if they do come up with a plan, Standard & Poor's said
last week it may still cut its Aaa rating on U.S. debt if the
agency is not convinced of medium-term fiscal stability.

Market players said a ratings cut may actually serve to
benefit the greenback against currencies perceived to carry
greater risk.

"The euro is not a safe-haven currency but the dollar still
is," said Raghav Subbarao, currency analysts at Barclays
Capital. "In the event of a possible downgrade of the U.S. debt
rating the dollar should actually do well over riskier assets,
but will struggle against the yen and the Swiss franc. Copyright @ 2011 - Theme by NanLimo - Thanks to Google