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Sun 11 Sep 2011 02:58 PM

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Euro drops broadly, may stay pressured this week

Money markets have priced in interest rate cut from European Central Bank by year-end

Euro drops broadly, may stay pressured this week
Euro fell to its lowest against the dollar in more than six months on Friday

The euro looked vulnerable in the upcoming week after falling to its lowest against the dollar in more than six months on Friday in the wake of an ECB board member's resignation and the bank's monetary policy shift to a neutral bias.

Money markets have consequently priced in an interest rate cut from the European Central Bank by year-end.

Strategists believe the euro could drop to $1.30 in fairly short order as euro zone officials muddle through the region's sovereign debt crisis, with $1.35 a key focus next week.

News of ECB Executive Board member Juergen Stark's resignation over the bank's purchases of peripheral euro zone bonds caught investors by surprise. The ECB has been buying government debt of highly indebted euro zone countries such as Italy, Spain and Portugal to help shore up their finances.

"The market has been euro-focused today because of all the negative headlines and we have been bearish on the euro since June," said Tom Fitzpatrick, chief technical strategist at CitiFX in New York.

"I wouldn't be surprised if the euro hits $1.35 over the next week or two and $1.30 by the end of the year. It would be a struggle to get back above $1.40."

The euro was also hurt by rumors on Friday that Greece could default this weekend, speculation that the Greek finance minister rejected.

News in Europe overshadowed US president Barack Obama's proposed $447bn jobs package on Thursday night, although there was a brief trading flurry early in the Asian session following his speech.

Some investors though were skeptical that Obama's package on jobs, made up largely of tax cuts for workers and businesses, can sail smoothly through a divided Congress.

The euro fell as low as $1.36268 on electronic trading platform EBS, its lowest level since February 22, and was last down 1.6 percent on the day at $1.36613.

With weekly losses of 3.6 percent, the euro zone's common currency posted its worst showing since mid-August.

Clark Yingst, chief market analyst at broker-dealer Joseph Gunnar in New York, said euro/dollar seems to be emerging from a short-term six-month consolidation and the outlook is bearish.

He added that given its strong positive correlation with the S&P 500, US stocks "have yet to establish a true and trustworthy bottom and could be headed for new lows."

One of the euro's early supporters among fund managers has started to scale back its holdings of the currency. Palo Alto, California-based Merk Investments, with more than $850m in assets, said it sold over $90 million worth of euros late on Thursday to reallocate to the Australian dollar.

The firm though remained positive on the euro longer term and believed euro zone worries should primarily be reflected in bond market prices and not in the currency market.

Against the yen, the euro fell to a low of 105.300 yen, the lowest since at least mid 2004, the earliest EBS data available at Reuters, before recovering to 105.860 yen, down 1.6 percent on EBS. The euro ended the week down 2.9 percent against the yen, its weakest showing since early May.

Against the Swiss franc, the euro was down 0.7 percent at 1.20702 francs on EBS, still above the 1.20 floor set by the Swiss National Bank this week.

The dollar, meanwhile, rose 0.9 percent versus the franc to 0.88340 after hitting 3-1/2-month highs at 0.88640. For the week the dollar posted steep gains of more than 12 percent, its best weekly performance ever.

"The Swiss National Bank's (1.20 floor in euro/dollar) has diminished the appeal of the Swiss franc as a safe haven from euro area concerns. But with euro area issues remaining uncertain, we expect the franc to underperform the dollar next week," said Barclays Capital in a research note.

The focus now shifts to a meeting of G7 finance ministers in France on Friday though few are expecting any ground-breaking agreement on steps to ease fiscal problems in the euro zone.

G7 officials are considering issuing a communique after their talks, a G7 source said, and if they did it would discuss the global economic slowdown, financial market turmoil and the policy tools different countries could use, It would, however make no reference to concerted intervention.

The ICE dollar index rose to six-month highs of 77.276, helped largely by the euro's fall. It was last at 77.171, up 1.2 percent.

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