Euro reverses early gains

 

The euro fell against the dollar today as brief optimism after Ireland sought a bailout gave way to concerns about possible contagion to other highly indebted euro zone states.

The euro's fall coincided with a rise in the premium investors demand to hold Irish government bonds rather than benchmark German debt, reversing an earlier fall, after the country's junior coalition party called for fresh elections.

The call by Ireland's Green Party for a January election raised fresh political uncertainty over the country's outlook.

But many just worried the European/IMF rescue package might not be effective in the long term and would not stop markets from targeting fellow straggler Portugal.

"The risk of Ireland is somewhat off the table, but it puts the risk onto Portugal and possibly Spain, which represents much bigger risk for the euro," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

The call for an Irish election also "raises the risk for straight austerity measures being implemented with the risk the government is unable to implement the fiscal tightening measures necessary for the budget deficit," Mr Esiner said.

Rating agency Moody's said a "multi-notch downgrade" on Ireland was now likely.

The euro was down 0.4 per cent against the dollar at $1.3638, more than a cent off an earlier one-week high of $1.3786, when it pierced the 38.2 per cent Fibonacci retracement of its November 4th-18th fall at $1.3765.

The move lower today breached the 23.6 per cent Fibonacci retracement support level.

"The market is skeptical as there are still fiscal issues with Portugal and Spain. Investors have been undecided on the euro for a while now and I can see that uncertainty lasting into year-end," said Jane Foley, senior currency strategist at Rabobank in London.

Reuters