The euro struggled near four-month lows against the dollar on Tuesday as markets remained anxious about negative implications of the Cyprus bailout plan and if it would serve as a template for other euro zone economies.
The single currency was hurt by fears that future euro zone bank rescues could impose a burden on depositors. The overall bleak outlook of the broader euro zone economy and political uncertainty in Italy also weighed on it.
The euro was up 0.1 percent on the day at $1.2868, not far from Monday’s low of $1.2829, its lowest since November 22. Large option expiries were reported at $1.2750.
Traders cited the euro’s 233-day moving average at $1.28497 as near-term support and said they remain sellers of the euro on any rebounds.
On Monday, the euro tumbled after the head of the Eurogroup, Jeroen Dijsselbloem, said the rescue plan agreed for Cyprus will serve as a model for dealing with future banking crises. He later appeared to backtrack, saying Cyprus was a specific case with exceptional challenges.
“The developments yesterday were quite negative for the euro as it looks to be a bit of a change in policy approach within Europe with respect to bailouts. They seem to be putting the emphasis onto investors rather than tax-payers,» said Ian Stannard, head of European FX strategy at Morgan Stanley.
“That is going to keep the euro under pressure as it could well deter foreign investors from returning to peripheral European assets,» he said, adding that he expects the euro to test the $1.27-$1.2660 level in the coming days.
The deal for Cyprus involves raiding deposits above 100,000 euros in two of Cyprus’ largest banks, which are not guaranteed, to cover debts of Popular Bank of Cyprus, also known as Laiki, and to recapitalize Bank of Cyprus.
Although the deal brought temporary relief to markets, investors soon focused on the future ramifications of the bailout plan and what this meant for other larger economies with weak banking sectors.
In Cyprus, the scheduled reopening of banks has been postponed to Thursday from Tuesday and even then they would be subject to capital controls to prevent a run on deposits.
The euro’s sharp falls across the board on Monday were exacerbated by speculation of a credit rating downgrade for Italy, which is struggling to form a government after an inconclusive election last month.
The single currency was steady at 120.99 yen, staying above Monday’s one-month low of 120.08 yen.
The yen, which tends to rise in times of financial market stress, found some support on Tuesday on worries over Cyprus and the broader euro zone.
The dollar was down 0.1 percent at 94.02 yen and some way off a 3-1/2-year high of 96.71 yen hit on March 12.
Analysts said that although the yen’s overall weakening trend remained intact, with expectations for drastic Bank of Japan monetary easing already high, the dollar could run into some selling if policymakers disappointed at its April 3-4 meeting.
“Buying the yen, which has increased on concern about Europe, could accelerate on fears about Spain, lower yields on 10-year U.S. Treasuries, and of course if the BOJ disappoints next week,» said Junya Tanase, chief FX strategist at JPMorgan Chase Bank in Tokyo.Œ
Earlier in the day, the Japanese currency fell after the new BOJ Governor, Haruhiko Kuroda, reaffirmed his commitment to bold monetary easing to achieve 2 percent inflation.