Published: Mon, 09 Mar 2009 13:44:53 +0100

Euro Under Pressure as Equities Continue to Fall

(CEP News) - The euro is trading near the bottom of its range against the U.S. dollar on Monday as global equity markets continue to fall.

The euro continues to lose ground against the U.S. dollar, trading below 1.26 USD level ahead of the North American trading session. EUR/USD has been selling off since the start of the Asian session on the back of rising risk aversion.

Despite the drop against the greenback, the euro is showing modest strength this morning against sterling and the Japanese yen. In overnight trading, EUR/GBP hit a one-month high of 0.90973 GBP

The data released overnight continue to point to a more problems for the financial sector and weakening global growth. Over the weekend, it was announced that the UK government could raise its stake in Lloyds TSB to as much as 77% from 43%. The deal, which was reached Friday night, will help Lloyds TSB cover its exposure to asset-backed securities after purchasing HBOS in 2008.

According to some currency strategists, the euro is also under pressure following more concerns over Eastern Europe's banking system. On Sunday, the World Bank released a report saying it could face a financing gap of between $270-$700 billion for emerging markets. The report also warned that the financial disruptions could overwhelm the abilities of institutions like the World Bank and the IMF to provide a buffer.

Weaker Japanese data is also raising risk aversion. Japan's current account for January fell into its first deficit since 1996. According to the Ministry of Finance, the current account fell to a deficit of ¥172.8 billion versus an expected ¥15.3 billion shortfall and following December's ¥125.4 billion surplus.

Although EUR/USD is trading close to its recent lows, currency strategists are relatively neutral on the cross. Currency strategists from KBC pointed out that the U.S. dollar did not make any significant gains following a weaker-than-expected nonfarm payrolls report on Friday.

They added that the cross looks directionless as it trades near 1.60 USD.

"By default, the gradual euro downtrend persists. Nevertheless, we have the impression that the downside in the pair is also becoming more difficult," they said.

Jacqui Douglas, currency strategist from TD Securities, said she expects EUR/USD to remain rang bound for the time being. She also agrees that a break below 1.25 USD might not be sustainable.

According to some currency strategists, a sustained break below 1.2550 USD will be needed to highlight more weakness for EUR/USD.

Euro/USD down 0.69 cents to 1.2584

USD/CAD up 0.84 cents to 1.2956

USD/Yen up 0.69 points to 98.96

GBP/USD down 2.89 cents to 1.3802

AUD/USD down 0.58 cents to 0.6348

Euro/Yen up 0.16 points to 124.52

Euro/GBP up 1.40 pence to 0.9119

GBP/CAD down 2.60 cents to 1.7882

CAD/Yen up 0.01 points to 76.39

Euro/CAD up 0.21 cents to 1.6304

The U.S. Dollar Index is up 0.68 points to 89.20

All data taken at 8:38 a.m. EDT

By Neils Christensen, neilsc@economicnews.ca, edited by Stephen Huebl, shuebl@economicnews.ca