Tuesday, May 18, 2010


 
   By Karen Johnson 
   Of DOW JONES NEWSWIRES

TORONTO (Dow Jones)--The embattled euro gave up new ground to the traditional safe-haven currencies Tuesday afternoon, reaching intraday lows against the dollar and the yen on news that Germany would support a tax on the financial market sector.

German Chancellor Angela Merkel said Tuesday in Berlin that Germany would support a tax on the financial-market sector to contribute to the costs of the euro-zone sovereign-debt crisis.

"It's definitely put some pressure on the euro," said Liz Bussanich, currency adviser at BMO Capital Markets in New York. "I think that people still want to sell the euro on any kind of opportunity."

Germany's ruling center-right parties agree that the financial-market sector must contribute to the costs of the euro-zone sovereign-debt crisis if the lower house of parliament is to approve Germany's share of the EUR750 billion euro rescue plan. They demanded the introduction of a financial-transaction tax or financial-activities tax.

Tuesday afternoon, the euro was trading at $1.2285 from $1.2392 late Monday, according to EBS via CQG. The euro was at Y113.57 from Y114.33. The dollar was at Y92.44 from Y92.50 and at CHF1.1401 from CHF1.1309. The pound was at $1.4406 from $1.4470.

The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 86.597 from 86.149.

A calmer tone in the European session had enabled the euro to extend its rebound from a four-year low on Monday, a recovery driven in part by traders trimming their massive negative bets against the currency.

But the recovery proved fleeting, buffeted by faltering U.S. stocks and lingering nervousness about the euro-zone debt crisis and the EUR750 billion sovereign-debt rescue package.

A meeting of 16 European finance ministers that concluded Tuesday kept the euro-zone crisis in the spotlight, although it didn't generate any substantial new developments.

"The euro is very susceptible to headline risks," said Amelia Bourdeau, senior G10 currency strategist at UBS AG in Stamford Connecticut.

The same general faltering of investor willingness to take on risk that dragged the euro off its gains was reflected in retreat by the commodity currencies and a slight increase in the VIX index of stock-market volatility Tuesday morning, Bourdeau said.

The euro's ascent to technical resistance in the $1.2450 area contributed to its subsequent retreat, said Brian Dolan, chief currency strategist at Forex.com in Bedminster, N.J.

"So far, we've reached up to the key $1.2450 to $1.2500 resistance area, and that has stalled the euro gains," he said. "In the bigger picture, we're just consolidating, trying to hammer out a bottom in some of the risk assets."

The dollar surrendered some early gains against the yen after soft U.S. producer price data for April encouraged buying of U.S. Treasurys.

"Bond yields are under a little pressure as a result, and that tends to drive down dollar/yen," said Forex.com's Dolan.

The U.S. producer price index for finished goods fell by a seasonally adjusted 0.1% in April from March. Economists had expected a 0.1% increase.

U.S. housing starts rose 5.8% to a seasonally adjusted 672,000 annual rate in April, beating out expectations of a 3.8% rise to a level of 650,000.

An adviser to China's central bank said Tuesday the euro's plunge on Europe's sovereign-debt crisis won't deter China from diversifying its massive foreign-exchange reserves.

"Diversification is a long-term trend," Xia Bin, an adviser to the People's Bank of China, told Dow Jones Newswires in a telephone interview.

The euro gained support from the comments, which countered global speculation that the common currency's drop to four-year lows might prompt China, with the world's biggest reserves, to rethink its strategy of buying the euro to reduce its dependence on dollars.

-Karen Johnson, Dow Jones Newswires; 416-306-2022; karen.johnson@dowjones.com

(Don Curren in Toronto and Katie Martin in London contributed to this article.)

(END) Dow Jones Newswires

May 18, 2010 13:47 ET (17:47 GMT)