Mon Apr 23, 2012 4:24pm EDT
* Euro burdened by heavy political, debt auction schedule * Dutch political worries grow; FOMC, BoJ meetings ahead * Euro holds support at $1.3000 By Gertrude Chavez-Dreyfuss NEW YORK, April 23 (Reuters) - The euro slid against the dollar on Monday after two days of gains, rattled by poor euro zone data and concerns that the region's debt crisis could spread to healthier European nations amid a breakdown in Dutch budget negotiations. Analysts said sentiment toward the common currency was bearish, with most investors looking to sell on any rally before debt auctions this week in Italy and the Netherlands. After officials in the Netherlands failed to agree on budget cuts, Dutch Prime Minister Mark Rutte said he tendered his government's resignation. Analysts said the Netherlands needs to reach an agreement on budget cuts to avoid a sharp rise in borrowing costs similar to what Spain has suffered. The budget impasse could also threaten the Netherlands' triple-A debt rating, analysts said. Private data showing Germany's manufacturing sector contracted at the fastest pace in nearly three years in April also pressured the euro. A contraction in manufacturing and services also deepened in the euro zone as a whole. "By far, the bigger story for FX markets in 2012 should be the scale of euro zone growth underperformance. Today's large fall in the German manufacturing PMI is just a taste of things to come," said Richard Franulovich, senior currency strategist at Westpac in New York. Italian bond yields surged, as did French borrowing costs after Socialist Francois Hollande won the first round of France's presidential poll. Hollande has promised to renegotiate a European budget pact . In late afternoon trading, the euro fell 0.5 percent to $1.3151, holding below Friday's two-week high of $1.3226, according to Reuters. The euro hit session lows after the Dutch resignation news pushed it below support at its 100-day simple moving average, currently $1.3118. Many market participants expect the euro to trade in a range between $1.3000 and $1.3300, with worries about feeble euro zone growth likely to dominate sentiment. Analysts, however, said the euro could fall sharply if it makes a sustained break below strong chart support at $1.30. Other euro-linked assets also fell on Monday. The CurrencyShares Euro Trust ETF was down 0.5 percent at $130.90, which lifted the CBOE EuroCurrency Volatility Index by 4 percent to 10.27. The euro VIX index measures the market's expectation of 30-day volatility of the U.S. dollar/euro rate by applying the VIX methodology to options on the CurrencyShares Euro Trust ETF. On the charts, the euro has been carving out a head-and-shoulders top over the past two months, with gains repeatedly unfolding in three-wave, counter-trend moves, and declines have been impulsive, said MacNeill Curry, technical strategist at Bank of America Merrill Lynch in New York. For instance, he said Friday's highs in euro/dollar at $1.3228 looks to have completed a wave two, "indicating weakness should accelerate sharply in the sessions ahead." Curry said key euro support was at $1.3042/45, ahead of $1.30. Against the yen, the euro fell 0.9 percent to 106.75 yen , gaining no support from a weekend deal to double the International Monetary Fund's firepower to contain the debt crisis. Analysts said while the IMF managed to raise more than $400 billion, the new funds were well below the target of $600 billion and came with requests for further oversight. POLITICAL RISK FACTORS LOOM Although the news from the Netherlands was not unexpected, it sparked concerns that political uncertainty could put into question euro zone states' commitment to austerity measures, coming on top of growing worries about the shaky state of Spain's public finances. The yield spread on triple-A-rated Dutch bonds over German paper moved out to its widest point in three years, while the Italian debt yield spread also increased. Both the Netherlands and Italy hold bond auctions on Tuesday. Investors were concerned, too, that a victory in the French presidential election next month for the Socialist Hollande could loosen France's commitment to austerity. President Nicolas Sarkozy is the first sitting president to find himself behind after the first round of elections. The French run-off vote coincides with a parliamentary election in Greece, where support for the two main pro-bailout parties is at historic lows. There is also an Irish referendum on a euro zone fiscal compact agreement on May 31. The dollar, meanwhile, gained against most major currencies ahead of a two-day Federal Reserve policy meeting that begins on Tuesday. Investors are watching to see whether Fed policymakers bring forward their projection on when the U.S. central bank should start raising interest rates. The dollar index was last up 0.2 percent at 79.384. The dollar shed 0.5 percent against the safe-haven yen to trade at 81.13 yen. Yen gains were seen as limited before a Bank of Japan policy meeting on Friday, at which it is expected to adopt fresh easing steps.
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