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Euro slide on the yen threatens to snowball

TOKYO: The euro was threatening to pierce lifetime lows against the yen on Monday and spark a whole new wave of panic selling.

The catalyst for the latest slide came on Friday when Wall Street went on a barnstorming run and the rush to US assets swamped support at $0.9600, leaving it at $0.9576 here today.

And the rot quickly spread to the euro/yen as Japanese institutions scrambled to re-establish hedges prematurely unwound during the last two months of relative euro strength.

Traders also spotted US funds selling, presumably in the hope of tripping the stack of stop-loss sell orders rumoured to be lurking around the euro's record low of 102.05 yen.

"Japanese institutions have been stunned by the reversal in euro/yen," said a European bank dealer. At its late level of 102.91 yen, the euro had fallen more than eight percent in as many days and yen from on Friday's 103.40 in New York.

Institutions were thus desperate to re-hedge, fearing that a break of 102.00 would start a stop-loss snowball which would bury everyone in its wake, he said.

"Of course, the fall then becomes self-fulfilling. The only choice is: do you panic and sell now, or wait and panic later," he added.

Traders also suspected the Bank of Japan was well aware of this nightmare scenario and that was adding an edge of caution in case it stepped in to support the euro.

The BOJ did directly intervene in defence of the euro on a couple of occasions last year, but the action had not found favour with the European Central Bank which was keeping a strictly hands off approach to currency management.

"There's a general feeling that if the euro were to plunge from here, the BOJ could take a hand to smooth the fall," said a dealer at a US bank.

"But the market also knows that there's only so much a bank can do when the currency it's trying to protect isn't it's own."

The tensions over the euro seeped to the other yen crosses, where the dollar eased to 107.36 yen from 107.72 in New York on Friday, while the Australian dollar sagged to key support at 65.00 yen from 65.40.

Traders also reported US fund selling of the dollar from from 108.00 yen downwards but good support so far at 107.30.

The talk was that a number of US momentum funds who had been hugely short of the yen last month had been forced to abandon their positions and turn 180 degrees, with some seen selling dollar calls last week on a bet it would go lower.

Dealers said these and other speculators were now focused on triggering rumoured stop-loss offers beneath key 106.50 yen support, which could well yield a retreat to 104.50 or lower.

In contrast, the dollar had performed strongly against the euro and Swiss franc thanks to Friday's two percent rise in the Dow and 3.4 percent jump in the Nasdaq.

The gains came after a surprisingly soft February US payrolls report ignited hopes the Federal Reserve would not have to get tough on interest rates.

However, analysts thought the celebrations were premature given employment was a lagging indicator and almost all the leading indicators continued to point to above trend growth.

This camp noted that averaging January and February still produced monthly jobs growth of 213,500, not far from the robust levels seen in the fourth quarter.

Furthermore, Fed governor Laurence Meyer on Friday took a decidedly hawkish slant, arguing that the Fed's strategy was an aggressive one aimed at slowing growth to the trend rate, if not lower.

The comments had been largely overlooked in the euphoria at the jobs numbers, but analysts noted Fed chairman Alan Greenspan was due to give a speech on Monday about the new economy and any hardening in his tone would be harder to ignore. Currency bid prices All data taken from Reuters with percent change calculated from the daily US close. -Reuters