* Euro on track for worst monthly performance since May
* Contagion fears weigh as peripheral bond spreads widen
* Euro implied volatilities rise
(Updates prices, adds comment, changes byline)
By Julie Haviv
NEW YORK, Nov 30 (Reuters) - The euro slumped to
2-1/2-month lows against the U.S. dollar on Tuesday and more
losses are likely as fears about euro zone sovereign debt
prompt widespread risk aversion.
A financial rescue deal for Ireland failed to contain
contagion fears as the euro fell below the critical $1.30 level
and investors took out many options barriers on the way. The
next key figure to watch, traders said, is $1.2794, the 61.8
percent retracement of the June to November rally.
The euro was down nearly 7 percent on the month, on track
for its worst monthly performance since May when Greece
received a 110-billion-euro bailout.
In tandem with euro weakness, the premiums investors demand
to hold Spanish and Italian sovereign bonds over German debt
jumped to lifetime highs while yields on Portuguese, Irish and
Belgian bonds also widened. []
Camilla Sutton, chief currency strategist at Scotia Capital
in Toronto, said downside pressure on the euro remains well in
place after going below the $1.30 level in European trading.
Should support at the pivotal $1.30 sustainably give way,
$1.2920 and then the August-September support in the $1.2600 to
$1.2650 range present the next logical targets to the downside,
she wrote.
"Europe is making some very bad decisions with respect to
the whole region and the currency," said Peter Schiff, chief
executive officer at Euro Pacific Capital, an asset management
firm overseeing customer accounts of about $3 billion.
"They should not have bailed out Greece and Ireland, they
should have allowed them to restructure their debt, and allowed
their bondholders to take losses. Countries would now want to
go into debt because they want those bailouts and the countries
that are responsible get stuck with the bill," said
Connecticut-based Schiff.
Given sharply negative sentiment on euro zone assets, the
European Central Bank should take a more active hand in
managing the crisis, analysts said. Talk of an ECB quantitative
easing would not be surprising, said Boris Schlossberg,
director of FX research at GFT in New York.
The ECB's meeting this Thursday is therefore crucial as
investors will be looking for comments on how the bank could
help address growing jitters in the credit and currency market.
It is also widely expected to keep rates on hold and sources
say it could extend banks' access to unlimited three-month
funds beyond January. See [].
KEY TECHNICAL LEVELS
The euro <EUR=EBS> fell to $1.2969 on EBS, its lowest since
Sept. 15, before recovering to $1.3008, still down 0.7 percent.
Some traders said there is minor support at $1.2920, the Sept.
6 high. That level preceded a steep rally in the euro that took
it all the way to that early November high at $1.4283.
A slew of strong U.S. economic data lifted risk sentiment a
bit from midmorning, drawing bids away from the safe-haven
dollar and giving the heavily-battered euro some reprieve. For
a wrapup of U.S. economic data click on [].
Some traders said $1.3040 could act as resistance on any
intraday rebound.
Other euro-zone-linked assets such as euro exchange-traded
funds also fared poorly on Tuesday. The CurrencyShares Euro
Trust <FXE> traded on the Chicago Board Options Exchange was
down 0.86 percent at $129.60 after hitting a 2-1/2-month low at
$129.23. This ETF holds euro on-demand deposits in
euro-denominated bank accounts.
Traders said the ease with which the euro had broken key
levels in recent days reflected the extent of negative
sentiment towards the currency, which has lost roughly 9
percent against the dollar since its peak this month.
Euro/dollar implied volatilities spiked on Tuesday to a
peak of 15.55 percent <EUR1MO=>, the highest since at least
June, suggesting nervousness about the euro zone currency.
The one-month 25-delta risk reversals, a gauge of currency
sentiment, traded as low as -2.85 vols <EUR1MRR=GFI> for euro
puts versus a close of -2.73 on Monday.
Further reflecting the euro's negative bias, the latest
positioning data from the Commodity Futures Trading Commission
showed speculators going net short on the euro for the first
time since Sept. 14. []
The euro zone single currency slid to 1.2934 Swiss francs
<EURCHF=EBS>, 108.33 yen <EURJPY=EBS>, and 83.495 pence
against sterling <EURGBP=D4>, all more than 10-week lows.
With the spotlight on the euro, the dollar continued to
gain, hitting a more than two-month high at 81.444 against a
currency basket <.DXY>, lifted by safe-haven flows and recent
evidence of an improving U.S. economy. It last traded up 0.42
percent at 81.187.
(Additional reporting by Gertrude Chavez-Dreyfuss; Editing
by Andrew Hay)
