The euro slid to a two-month low against the dollar and hit a record low against the Swiss franc today, hurt by ongoing worries about the potential for debt restructuring by Greece, with market positioning pointing to the chances of a further drop.
The euro came under renewed selling pressure after its fragility was highlighted late last week when ratings agency Fitch downgraded Greece, and Norway said it was suspending a grant payment to the country.
The euro's drop gained steam after triggering stop-loss selling below 1.24 against the Swiss franc. The euro took out an option barrier at 1.2350 francs and hit a record low of 1.2345 francs on trading platform EBS. It was last down 0.4 per cent on the day at 1.2378 francs.
Against the dollar, the euro slid 0.8 per cent to $1.4044, having touched a two-month low at one point.
"The shape of euro/dollar's chart looks very bad. It's likely that the euro could test below $1.39 in the near term, which is a 50 per cent retracement between January's low and a high reached earlier this month," said Tsutomu Soma, senior manager for Okasan Securities' foreign securities department.
Greek prime minister George Papandreou and senior ECB officials said on Saturday that Greece must avoid debt restructuring and push on with budget cuts and privatisations to overcome its debt crisis.
But worries about some form of debt restructuring by Greece persist.
If Greece were to restructure its debt that could prompt Ireland and Portugal to follow with debt restructuring of their own, Adrian Foster, head of financial markets research for Asia-Pacific for Rabobank International in Hong Kong, said in a research note.
"It is difficult to imagine them proceeding with economically (and politically) painful fiscal austerity whilst Greece gets debt forgiveness," Mr Foster said.
The euro now has a cluster of support starting around $1.4000, which roughly coincides with its 200-week moving average.
Other possible downside targets include $1.3975, the bottom of the cloud on daily Ichimoku charts, a Japanese technical analysis tool used by market players. Another is the 100-day moving average near $1.3969.
The potential for further long liquidation suggested the euro could dip towards such levels in the near-term, said a customer dealer for a major Japanese bank.
"The euro seems likely to stay heavy and could make a try for levels near its 100-day moving average (at $1.3969)," the customer dealer said.
The latest positioning data from the US Commodity Futures Trading Commission shows that currency speculators reduced their net long positions in the euro to 41,645 contracts in the week to May 17th.
While that is well below the peak above 99,500 lots hit a few weeks earlier, it is still at the higher end of net long positions in the euro seen since late 2007.
Adding to the negative sentiment against the euro, Spain's ruling Socialists suffered a crushing defeat in local elections yesterday, a result that could make it hard for Socialist prime minister Jose Luis Rodriguez Zapatero to impose further austerity measures if needed to cut the budget deficit.
The euro's drop helped give a lift to the dollar, which hit a seven-week high against a basket of major currencies and rose above chart resistance, setting itself up for further gains.
The dollar index rose as high as 76.133, having clawed above resistance near 76.00, roughly the 38.2 per cent retracement of the dollar's January to May slide and where the dollar index peaked last week before turning lower.
The next retracement level lies near 77.00, the 50 per cent retracement of the same dollar drop.
The dollar rose broadly, with a drop in Asian equities and commodity prices suggesting that investors were cutting back positions in risky assets. In another sign of such risk reduction, the Australian dollar slid 1.1 per cent to $1.0544.
"Commodities and equities remain a focal point. I get the sense that they remain unstable," said a trader for a major Japanese bank in Tokyo.
A slide in commodities such as silver and oil earlier in May had spooked investors, prompting them to trim dollar-funded positions in risky assets and triggering a short-covering rally in the dollar.
The dollar edged up 0.2 per cent to around 81.88 yen. Traders said the dollar could extend its gains against the yen if stop-loss buying at levels near 82.10 yen is triggered.
Reuters
