Euro slides to 3-mth low vs dollar as Cyprus weighs

Euro slides to 3-mth low vs dollar as Cyprus weighs

NEW YORK - The euro tumbled to a more than three-month low against the US dollar and a roughly two-week trough versus the yen on Monday, as a bailout plan for Cyprus that will tax bank deposits spurred contagion worries in the euro zone.

Euro zone finance ministers demanded at the weekend that Cypriots pay up to 9.9 per cent of their bank deposits in exchange for a 10 billion euro bailout.

The move broke with previous EU protocol that citizens' savings are sacrosanct and led to worried Cypriots emptying cash machines on the island as they rushed to access their funds.

"The path Cyprus has chosen and the risk of a bank run has increased contagion fears," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto. She added that Scotiabank is keeping its year-end euro target of US$1.27 against the dollar.

The speaker of Cyprus's parliament said lawmakers will vote on the plan Tuesday, postponing the vote by a day, as the government works on a plan to soften the blow for small savers.

Analysts said any changes to help smaller depositors could limit euro losses, but that overall the euro would remain vulnerable.

The euro dropped to a three-month low of US$1.2880 in Asian trade, before paring losses to last trade down 0.9 per cent on the day at US$1.2951. Traders said robust offers to sell were at US$1.2946, with most investors likely to use a bounce to initiate fresh bets against the euro.

Scotiabank's Sutton said all the technical signals are in "sell" territory in the euro/dollar pair, with the relative strength indicator not yet in oversold territory.

Against the yen, the euro fell 1.2 per cent, briefly breaking through support at 121.68 yen, its 55-day moving average. It dropped as low as 121.55, the lowest since March 6.

"If this tax is levied it will set a precedent. It raises questions over whether other deposits will be safeguarded in other countries," said Jane Foley, senior currency strategist at Rabobank.

"Euro zone politicians will be at pains today to manage down the danger of contagion to other (peripheral) markets. The euro will find a little bit of support from that but markets will remain jittery."

Yields on bonds of struggling euro zone countries like Spain and Italy rose while those on safe-haven German bunds fell, with investors wary of any fresh signs of contagion from Cyprus.

Reflecting that nervousness, in the options market one-month euro/dollar implied volatilities jumped to 13.33 per cent in New York trading from around 7.7 per cent on Friday.

Euro/dollar one-month risk reversals which measure the relative demand for options on the euro rising or falling were showing a growing preference for euro weakness.

The euro fell 0.4 per cent against the Swiss franc to 1.2228 francs and 9 per cent against the British pound to 85.72 pence. Both the franc and the pound are bought when risks to the euro zone debt crisis escalate.

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