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Mon 19 Sep 2011 08:35 AM

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Euro slides 1 percent, unimpressed by EU meet

Euro may hold above last week's seven-month low in short term, analyst says

Euro slides 1 percent, unimpressed by EU meet
The euro got off to a rocky start on Monday (AFP/Getty Images)

The euro got off to a rocky start on Monday, with its
weakness gathering pace after a series of political setbacks in Europe over the
weekend prompted a flight to safety.

The euro lost about 1 percent on the day to $1.3664 and fell
0.8 percent to 105.06 yen as investors reacted badly to an unproductive
European Union meeting in Poland.

A cancellation of a visit by Greek prime minister George
Papandreou to the United States to chair an emergency meeting and a regional
election defeat for Germany's chancellor Angela Merkel added fuel to an already
tense euro.

"What happens this week? The euro is going to come
under pressure - as it already has this morning," said Rob Ryan, FX
strategist at BNP Paribas in Singapore.

Policymakers from the European Union (EU) and the
International Monetary Fund (IMF) will probably approve the next tranche of aid
for Greece in the end, "but in the meantime the uncertainty is weighing
heavier and heavier," Ryan said.

With a two-day US Federal Reserve policy meeting looming
ahead on Tuesday and Wednesday, the euro may manage to hold above last week's
seven-month low in the near-term, he added.

The euro dipped briefly below its support level near
$1.3664, the 61.8 percent retracement of last week's rally to $1.3937 from a
seven-month trough of $1.34949 on trading platform EBS.

The next Fibonacci support lies near $1.3599 the 76.4
percent retracement of the same rally, with more support at its September 14
intraday low near $1.3590.

Market talk that an Asian sovereign account sold the
Australian dollar and the euro helped push the greenback higher this morning.

"This week will be another good one for the USD with
weakness in euro, pound and Aussie," said Joseph Capurso, currency
strategist at Commonwealth Bank of Australia.

Capurso expected the single currency to fall to
$1.3200-$1.3300 this week.

With the Swiss franc no longer a safe harbor due to Swiss
National Bank selling and the yen also dogged by the danger of more
intervention by Japanese authorities, the greenback outperformed major
currencies.

The dollar rose broadly, edging up 0.1 percent against the
yen to 76.87 yen and climbing 0.7 percent versus the Swiss franc to 0.8823. The
greenback's rise knocked sterling down to an eight-month low of $1.5685.

Commodity currencies were also under pressure with the
Australian dollar sliding 1.2 percent to $1.0240.

CBA's Capurso anticipated the Aussie to test $1.0000 by the
end of the week. The Australian dollar broke above parity in March and only
dipped under it for a few hours in August, when it bottomed at $0.9927.

Trading is likely to be thinner than on Monday as Japan is
closed for a holiday.

The US Federal Reserve begins a two-day policy meeting on
Tuesday amid talk it will take further quantitative steps, such as lengthening
the maturity of its debt holdings.

"The Fed seems unlikely to engage in a third round of
quantitative easing just yet," Mansoor Mohi-uddin, head of foreign
exchange strategy for UBS, said in a recent research note.

"Instead we expect the Fed will agree to shift the
composition of its balance sheet away from short dated assets to longer term
bonds. This will help flatten America's yield curve further. But with ten year US
yields above German and Japanese yields, the impact on the dollar is likely to
be muted," he added.

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