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Euro looking sick, fiscal woes fester

Source: Reuters - Mon 8th Feb 2010

The euro and growth-linked currencies were on slippery ground on Monday as risk appetite was subdued on the back of mounting fiscal worries in the eurozone and lingering concerns about a global tax on banks.

Traders said investors were sceptical of the Group of Seven's reassurance on Greece and every move up by the euro was being used as a selling opportunity.

At the weekend G-7 meeting of finance ministers and central bank governors, no new statement on currencies was issued, but support was rising for a levy on banks that could pay for global governments' rescue of the financial system.

Last month U.S. President, Barack Obama spooked financial markets when he proposed tough reforms for the banking sector.

In early Asian trade, the euro was down at $1.3650 and not far from $1.3586, its lowest level since May 2009. It lost more than 1 percent last week, its fourth consecutive week of losses.

The single European currency has shed around 10 percent from its December 2009 high around $1.5140, as jitters about the fiscal problems in Greece spreading to Portugal and then to Spain intensified.

The euro eased to 121.76 yen, from 122.09 yen late on Friday in New York. It fell as low as 120.64 yen on Friday, its lowest since February 24, 2009.

Investors tend to buy the yen and dollar in times of heightened risk aversion as they unwind leveraged carry trades financed by borrowing in both these currencies.

"The risk aversion emanating from Greece, China tightening fears, renewed concerns about the performance of financial stocks, and Obama's banking plan is taking a life of its own, and the fragility of the recovery is now a market millstone" said David Watt, senior currency strategist at RBC Capital.

"It seems like old times, in that two days of closure are treated as two days when events can spiral out of control, rather than a restful weekend."

The dollar index .DXY, was steady at 80.432, not far from a high of 80.683, its strongest since July 2009.

But the dollar lost ground against the yen, dropping to 89.20 yen, from 89.38 yen late on Friday when it gained 0.48 percent, helped somewhat by the mixed U.S. jobs numbers.

Traders in Tokyo expect the dollar to trade between 88.80 yen to 90.00 yen, caught between the greenback's broadly firm tone and the weakness in cross/yen pairs.

Latest data shows speculators have been adding to long positions in the U.S. dollar while they increased their short positions against the euro. Net long positions in the U.S. dollar were highest in 11 months.

Speculators were also net long on the yen, swinging from a net short position in the week to Jan 26, reflecting a dramatic shift in sentiment against leveraged trades.

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