* Euro's next major trough on charts lies at $1.1640
* Short positions against euro at record highs
* Sterling marks lowest since March 2009
By Kaori Kaneko
TOKYO, May 17 (Reuters) - The euro slumped to a four-year low
on Monday, as investors dumped the single currency on sovereign
debt worries and fears that recent belt-tightening measures would
hurt a recovery in the euro zone area.
The euro <EUR=> extended its losses after falling below
$1.2300, where option barriers were said to lurk, and fell as far
as $1.2234 on trading platform EBS, its lowest since April 2006.
It has dropped more than 7 percent against the dollar this
month, and is about 14 percent lower for the year, making it the
worst-performing major currency. The euro's next major trough on
charts lies at $1.1640, a low hit in November 2005.
"Technically, the euro has been oversold but since the market
is not showing substantial short-covering, players have no choice
but to sell the euro," said a trader at a Japanese bank.
"Risk aversion stemming from the euro zone fiscal crisis will
likely keep investors shifting their funds into safer assets such
as the dollar, the yen, U.S. Treasuries and gold."
There are worries about the health of European banks which
have exposure to sovereign bonds in Greece and some other euro
zone nations with high fiscal deficits, the trader added.
On Friday, the euro had plunged to its lowest level against
the dollar since late October 2008 with losses deepening after
European Central Bank policymaker Axel Weber saying that it was
important not to underestimate lingering dangers to financial
stability. [].
German Chancellor Angela Merkel said on the Sunday the $1
trillion rescue plan stitched together by the European Union and
the International Monetary Fund only bought time to sort out the
yawning gap between the euro zone's strongest and weakest
economies. [].
Last week the currency had briefly rallied towards $1.31
after the rescue package was announced before worries about the
euro zone's growth outlook came back into focus. Traders fear
that the austerity measures announced by Greece, Spain and
Portugal would hurt growth in the near term and force the
European Central Bank to keep rates low in the medium term.
An analyst said the euro looked to have further to fall given
the relative weakness of the EU's growth outlook compared with
the United States.
"This suggests EUR/USD should be trading below, or at least
closer to, its long-run fair-value, which we estimate at around
$1.2100," said Bank of New Zealand currency strategist Mike
Jones.
Data released Friday showed speculative bets against the euro
hit a record high in the week to May 11. [].
Against the yen, the euro fell 1.4 percent to 112.74 yen
<EURJPY=R>, heading closer to an eight-year low of 110.49 yen hit
earlier this month.
Sterling slid to its lowest level since March 2009 at $1.4249
<GBP=D4> before edging back to $1.4300, down 1.7 percent on the
day. The pound fell on stop-loss selling and data suggesting that
the past year's rise in British house prices may be cooling.
[]
British newspaper reports saying Britain's new government was
critical of the previous Labour-Party administration's fiscal
policies, weighed on sterling, market players said.
Britain's new government has inherited "fiddled" public
finances, new Finance Minister George Osborne told the Financial
Times in an interview published on Monday. []
Separately, the Sunday Times online edition reported that the
British government has accused Labour of pursuing a "scorched
earth policy" before the general election, leaving behind
billions of pounds of previously hidden spending commitments.
All the weakness in the euro and the pound were helping the
dollar index <.DXY>, which rose above 87.00, the highest since
March 2009.
Yen crosses broadly fell with the Australian and the New
Zealand dollars dropping more than 1 percent. <AUDJPY=R>
<NZDJPY=R>.
Dollar/yen <JPY=> dropped 0.6 percent to to 91.92 yen.
There was little market impact from comments by Fitch ratings
saying it had not taken any action on Japan's sovereign rating on
Monday and that the outlook for the rating is stable, or from
earlier rumours that Fitch may downgrade Japan's rating.
"We have not taken any rating action on Japan this morning.
The foreign currency rating is AA, and its outlook is stable. The
local currency rating is AA-minus and the outlook is stable,"
said Vincent Ho, sovereign rating analyst at Fitch ratings.
(Additional reporting by Gyles Beckford in Wellington,
Anirban Nag in Sydney and Masayuki Kitano in Tokyo, and Reuters
FX analyst Rick Lloyd; Editing by Joseph Radford)
