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Wed 2 Nov 2011 11:07 AM

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Euro near 3-week low as Greece rattles investors

Euro wallows against dollar after Greek PM said he would push ahead with a referendum

Euro near 3-week low as Greece rattles investors
The euro suffered its worst two-day beating since May after Greeces shock call for a referendum

The euro wallowed near a three-week low against the dollar on Wednesday, having suffered its worst two-day beating since May after Greece's shock call for a referendum sparked jitters about the eurozone debt deal and sent riskier assets tumbling.

As traders covered their shorts following the slide, the euro was steady at $1.3695 , leaving a seven-week peak of $1.4248 set last Thursday but a distant memory. That kept the dollar index near a three-week high of 77.400, close to Tuesday's peak of 77.676.

Earlier, the euro hit the day's lows after Greek Prime Minister George Papandreou reiterated he would push ahead with a referendum on an EU bailout deal, defying demands from lawmakers of his own party that he quit for jeopardising Greek membership of the euro.

He also urged the two-day meeting of G20 leaders starting on Thursday in Cannes, France, to agree to policies that "make sure democracy is above market appetites."

"I don't think the euro's fall is going to stop around $1.37 ahead of the referendum. The chances of the EU deal being rejected are very high - if that happens, we will be back to square one," said Minori Uchida, senior analyst at the Bank of Tokyo-Mitsubishi UFJ.

"Worse still, while we await the Greek move, the markets will keep pressing Italy and that's where the real danger lies," Uchida said.

Despite the European Central Bank's support for the Italian bond market, 10-year Italian yields soared to a euro era record of around 6.3 percent on Tuesday. The cost of insuring against Italy's default jumped with credit default swaps trading at 515 basis points, some 70 basis points wider than before the EU summit last week.

The euro has now retraced half of its short-covering October rally from $1.3145 to $1.4248. The next Fibonacci support is seen at $1.3565, a 61.8 percent retracement of that rise.

A daily close below the $1.3697-$1.3653 pivot zone would confirm a medium-term top and a turn in trend, paving the way to the $1.2859-$1.3048 support area, warned Bank of America/Merrill Lynch technical analyst MacNeil Curry.

The options market also indicated a fair amount of pessimism about the euro, with volatility hitting a one-month high on Wednesday, suggesting investors see more need to hedge against any negative events that may come out of Europe.

Implied volatility on one-month euro/dollar options, a gauge of expectations regarding a currency's price action, jumped to 16.35 percent from the lows of 12.75 percent marked last week.

Some players speculated that the euro might win respite in the short term as market attention turns to the outcome of the US Federal Reserve's policy meeting, where the central bank may prepare markets for further monetary policy easing.

But most analysts were sceptical that the Fed could turn the tide on the euro, with most thinking that risk sentiment will sour further and both the dollar and the yen will keep benefiting from safe-haven inflows.

"While that may prevent a sharp fall in the euro or sharp fall in risk appetite ahead of the FOMC, the risk is still more to the downside for those currencies. It'll be very hard for the market to want to buy the euro given the intense uncertainty around Greece," said Greg Gibbs, strategist at RBS in Sydney.

The meeting could also end up as a non-event, in which case the ECB's policy meeting on Thursday and US non-farm payrolls data on Friday would take centre stage.

The Fed will release its post-meeting statement at 1630 GMT, and Chairman Ben Bernanke will hold a media briefing at 1815 GMT.

The dollar lost 0.3 percent to 78.13 yen . Japan on Monday sold a record of nearly $100 bn worth of yen that drove the dollar from a record low around 75.31 yen to a high of 79.55 yen, keeping markets on edge that it may intervene again.

"The FX market is not at the moment prepared to challenge the Japanese authorities and push USD/JPY back below 78, but at this point the MOF doesn't seem keen to force USD/JPY higher either," said Kit Juckes, strategist at Societe Generale.

Analysts said that the pair may stabilise around 78.00 yen for now, as both currencies were poised to benefit from safe-haven inflows amid rising uncertainty.

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