Euro falls to two-month low on debt fears
Monday May 23 2011 | 07:30 AM

The euro dropped to its lowest against the dollar for two months and a record low against the Swiss franc on Monday as worries over the eurozone sovereign debt crisis continued to undermine the single currency.

The euro suffered as Standard & Poor’s rating agency downgraded its outlook on Italian government debt and speculation grew over Greek debt restructuring.

Also undermining the single currency were poor election results for the ruling parties in Germany and Spain, which highlighted voter discontent in both the richer and poorer areas of the eurozone over bail-out proposals.

Weaker eurozone manufacturing and services sector purchasing managers’ surveys than expected for May added to the pressure on the euro.

Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ said probably the most worrying development for the euro was the surge in Italian government bond yields in response to S&P’s move.

He said: “Italy has the largest government bond market in the eurozone and continued rising yields there over the coming weeks would have a very destabilising impact on the eurozone debt markets.

“With the authorities still seemingly divided over how to proceed with the debt crisis there remains considerable short-term risks for the euro.”

The shift in sentiment against the euro was highlighted by positioning data from the Chicago Mercantile Exchange, often used as a proxy for hedge fund activity, which were released over the weekend.

Speculators cut the value of their bets on further gains for the single currency by $3.5bn to $7.4bn in the week to May 17 according to the data. This meant that long euro positions have been cut by over 50 per cent since they hit multiyear highs just two weeks previously.

Analysts said bets on gains in the euro were likely to have been scaled back further given the negative developments in the eurozone since May 17.

Jens Nordvig at Nomura said: “This total has likely fallen further, putting euro net positioning at neutral levels”.

The euro fell 1.3 per cent to $1.3973 against the dollar, its weakest level since March 18.

The single currency also dropped 0.6 per cent to a record low of SFr1.2345 against the Swiss franc, lost 0.7 per cent to £0.8667 against the pound and fell 1.5 per cent to Y113.90 against the yen.

Meanwhile, growing concerns over eurozone sovereign debt and weaker Chinese manufacturing data than expected heightened risk appetite and boosted haven demand for the dollar and the yen.

The dollar rose 0.7 per cent to $1.6117 against the pound, climbed 0.7 per cent to SFr0.8832 against the Swiss franc and was 1.3 per cent stronger at $1.0520 against the Australian dollar.

The yen fared even better, climbing 0.2 per cent to Y81.50 against the dollar.