Tuesday, November 1, 2011

Euro dives below US$1.37 on Greek referendum call

NEW YORK: The European single currency fell below $1.37 on Tuesday after debt-plagued Greece shocked investors by calling a referendum over the nation's latest EU bailout.

Adding to the toxic mix, indebted Italy's bonds came under acute pressure on heightened concern over spreading debt contagion from the eurozone crisis.

The euro tumbled as low as $1.3609, its lowest level since October 12, before recovering to $1.3697 at 2200 GMT, down from $1.3851 late Monday.

It was a big drop from the $1.42 level struck last Thursday, following the EU summit's reaching a comprehensive deal to resolve the months-long crisis in the euro zone, beginning with a new Greek debt reduction and austerity deal.

"This throws all the summit's deliberations up in the air, even though they were considered lame in the first place," said David Morrison of currency specialist FX360.

"In consequence, investors are rushing to reduce their risk exposure across the board and fleeing into the relative safety of the dollar and US Treasuries."

The euro fell to 107.29 Japanese yen, down from 108.28 yen, while the dollar rose to 78.34 yen from 78.16.

The dollar was almost unchanged at 0.8869 Swiss francs. The British pound fell to $1.5950 from $1.6073.

While the euro zone crisis will continue to drive markets - France and Germany have already called another emergency summit to deal with the Greek issue - traders will also be watching whatever comes out Wednesday from the meeting of the US Federal Reserve's policy board.

While few expect any overt policy decisions - interest rates should be kept at the ultra-low levels - some anticipate signals in the language the Fed uses to indicate the medium-term direction of monetary policy.

"The rally in the greenback and the sell-off in equities indicate that investors are focused on one thing and one thing only, which is the uncertainty in the global economy," said FX360's Kathy Lien.

"What this means is that if the Federal Reserve eases monetary policy because they have grown more pessimistic about the outlook for the US economy, it may not be as overwhelmingly negative for the dollar as most people would normally expect.

"It is perfectly feasible and probably likely that the dollar will rise against risk currencies if the Fed takes additional steps to ease monetary policy."

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