The EURO plunged to its weakest level in nearly a year against the dollar Wednesday, as thin market conditions converged with concerns that Italy’s impending debt auction could fall short of expectations. The euro tumbled as low as $1.2939, down nearly 1% on the session before rebounding slightly in illiquid trading. That was its weakest level since January.
A better-than-anticipated short-term Italian debt auction momentarily alleviated fears that the euro zone’s debt crisis could claim its third largest economy as its next victim. But the import of the six-month treasury bills — where Italy sold EUR 9 billion at half the cost it paid just a month ago — quickly evaporated, sending nervous investors flocking to the dollar for safety.
Analysts also attributed the sudden shift away from risk-sensitive assets to mounting tensions between the U.S. and Iran over the Strait of Hormuz.
Some investors grew wary that Thursday’s 10-year auction of Italian debt might prove a stiffer test for financially strapped Italy. Benchmark long-term yields currently hover uncomfortably close to 7%, a level that prompted euro-zone members Portugal and Ireland to seek bailouts. Meanwhile, the EUR bought Y100.90, just a fraction above a 10-year low against Japan’s currency at Y100.77.
Despite last week’s record EUR489 billion three-year tender by the European Central Bank to liquidity-challenged euro-zone banks, data suggests that most of them are choosing to hoard their new cash rather than using it to help support government bond markets. The ECB reported earlier that the amount of money parked by euro-zone banks at the central bank soared to EUR452 billion — a new record that eclipsed the EUR411.81 billion reached over the Christmas break.
CFTC data from Friday, for positions as per last Tuesday (Dec 20), suggests that spec positions are still short euros, with positions extended (-113,697 contracts Dec 20 vs -116,457 contracts Dec 13 – a record euro short).
EasyForexNews Research Team