The euro slipped today, retreating from a 4.5-month high against the dollar as worries about debt problems in Portugal and Ireland sapped appetite for the currency and its near-term outlook is seen hinging on whether Lisbon's make-or-break attempt to garner parliamentary support for its austerity measures will succeed.
Portugal's political crisis has quashed the latest rally in the euro, which climbed to $1.4249 the previous day, but some analysts said any selling in the euro if the government fails was unlikely to extend far below $1.41, given expectations EU leaders are close to agreeing the details of a debt-rescue fund, while euro zone interest rates are widely seen rising next month.
Lisbon's parliament will vote on the government's latest austerity measures on Wednesday and Prime Minister Jose Socrates has threatened to resign if the opposition fails to approve the measures, setting the stage for a potential collapse of his minority government a day before a European summit where leaders are due to discuss steps to deal with debt problems.
"The Portugal situation has put a spanner in the (euro's rally) with the suggestion the government may fail today, and the implication would be the resulting uncertainty would push the country towards a bailout," said Robert Ryan, senior G10 currency strategist at BNP Paribas in Singapore.
"But would that come as a big surprise to the market? I don't think so ... We could see a dip below $1.41 but I don't think we will go to much further. The ECB has made it clear that regardless of the situation with the periphery, they will go ahead with a hike in April."
Also causing some uncertainty about the health of the euro zone were rumours that AIB, which has been effectively nationalised, was planning to miss a coupon payment, driving the premium that investors demand to hold Irish two-year bonds to a euro-era high.
AIB said in a statement that it would pay the coupon due on March 23rd as scheduled.
The euro traded at $1.4165 in Asian trade. A further slide was blocked by suspected bids from model funds in the $1.4140/50 region, while an option barrier at $1.4250 capped the euro's advance.
On charts, the euro was poised for a pull-back to support at $1.4030/50 - intraday peaks from earlier this month - but only a drop below the $1.40 level would suggest a peak had been put in place and its solid uptrend was reversing.
The euro's yield advantage over the dollar is likely to provide some cushion for the currency, analysts said. The European Central Bank is widely expected to raise its benchmark rate by 25 basis points from a record low 1.0 per cent next month.
Sterling traded at $1.6362, holding near a 14-month high hit yesterday after stronger-than-expected British inflation data increased the chances of an interest rate rise within the next few months. Traders said the pound may rise as far as $1.65 if Bank of England minutes, due later in the day show a more hawkish bias among policymakers.
The dollar slipped a touch on the day to 80.90 yen, but stuck close to 81.00 yen region as traders turned cautious about buying the currency after the Group of Seven (G7) countries sold it last week in their first joint intervention in more than a decade.
Market participants were wary of intervention particularly below 80.50 yen, where the Bank of Japan came in last Friday, while few in the market expected big gains in the dollar.
"Any rise in the dollar is likely to be subdued, and it may dip gradually. We might see the dollar dip below 80 yen, but given the wariness about intervention, I don't get the sense that the dollar will fall sharply below 79 yen," said an options trader for a major Japanese bank in Tokyo, referring to the dollar's outlook against the yen for the rest of March.
Heavy exporters offers are already lined up above 82.00 yen, with more seen around 83.00 yen, and the trader added he suspected the balance of dollar/yen flows would be tilted towards dollar selling during the last stretch of Japan's financial year ending this month, as Japanese exporters are likely to sell.
The last week of March commonly sees a mix of dollar flows including exporter selling and buying by investors related to overseas investments in the new year. Still, market participants have been speculating that such buying demand may be limited this year given the recent drop in Japanese equities, which could sap domestic investors' risk appetite.
The G7 may have sold around 530 billion yen last Friday as they intervened to weaken the currency, data from the Bank of Japan showed today.
That amount is far smaller than the approximately 2 trillion yen indicated by market talk, although some analysts said the figure was not a surprise.
Reuters
