Forex Market Update: Euro Hovers Around Four-Month Low Against U.S. Dollar

The euro hovered around its four-month low against the U.S. dollar on Thursday and could further slide as market participants remain edgy over the state of health of currency bloc’s economy, which is not only worsening but also hurt by rising threat of capital outflows from banks (following Cypriot bailout deal) and simmering concerns over political gridlock in Italy.

The euro edged down 0.1 percent on Thursday to trade at $1.2770, which is not far away from its four-month low level of $1.2750 hit in the preceding session.

According to Reuters, traders believe that month-end demand from investors who will look to rebalance their bonds and stocks portfolio could provide some support to euro.

On Thursday banks in Cyprus, after remaining closed for almost two weeks, reopened amid very tight controls in order to avert bank runs. Although this restrictive measure would help capping outflows, market participants are worried over the bailout deal between the Cypriot government and international lenders. Investors are worried that the bailout deal, which resulted in heavy tax burden on large depositors, could serve as precedent for futures recues in the currency bloc. And if the contagion spreads then euro can take more pounding.

In this backdrop, investors could shun euro and seek safety in other steady currencies such as the U.S. dollar, Swiss franc, Australian dollar, yen or even pound sterling.

Adding to the woes is political stalemate in Italy. Earlier on Wednesday, Italy’s center left head Pier Luigi Bersani ruled out forming coalition government, leading to sharp increase in nation’s borrowing cost. Looking at current logjam in Rome, it seems Italy is heading towards re-election.

“If Italy has to hold a re-election, that will surely remind the market of a fall in the euro after Greece was forced to hold a re-election last year,” said Ayako Sera, market economist at Sumitomo Mitsui Trust bank, according to Reuters.

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Post Written By: Ed Liston Ed Liston is a senior contributing editor at TheStockMarketWatch.com. An active market watcher and investor, Ed guides an independent team of experienced analysts and writes for multiple stock trader publications. He is widely quoted in various financial publications on the Internet. When Ed is not writing about stocks, investing in stocks, talking about stocks, or otherwise doing something stock related, he likes to go sailing and fishing in his yacht.