Euro falls as Italy optimism proves short-lived

 

euro fell against the dollar on Monday as initial optimism about prospects of crisis-fighting reforms under new governments in Italy and Greece gave way to caution over the huge debt problems still plaguing the single currency zone. On Sunday, Italy's president appointed former European Commissioner Mario Monti to head a new government charged with implementing urgent reforms to end a crisis that has endangered the whole euro zone. On Monday Italy sold 3 billion euros of five-year bonds at yields that, while down from last week's record market highs, were elevated enough to underscore the challenges the country's new technocratic government faces to restore market confidence, leaving many investors bearish on the single currency. After a modest rally in Asian trading, the common currency last stood at $1.3665, down 0.6 percent on the day having been briefly boosted by some relief following the debt auction. "When you have good news and the euro doesn't rally, you're probably going to be headed lower over the week... I'd say you're selling into rallies from $1.3750," said Geoff Kendrick, currency strategist at Nomura in London. Earlier the currency rose as high as $1.3811, with near-term resistance near its two-week high of around $1.3870 and offers from Asian sovereign investors cited above that. Traders cited sizeable options expiries at $1.3750. After Italy's 10-year bond yield soared to levels seen as unsustainable above 7 percent last week, markets remained nervous over the consequences of more pressure on the euro zone's largest government bond market. Some traders said that for the euro to post more gains, it would have to break past decent resistance at around $1.3870. "The fact that we have these technocratic governments in place is a positive, in that they'll press toward the sort of austerity measures required," said Simon Derrick, head of currency research at Bank of New York Mellon. "After a bit of consolidation we'll have the euro testing back up, and we'll be having a look at $1.3850 again in the not-too-distant future." In Greece, new Prime Minister Lucas Papademos begins the tough task of rebuilding Greece's credibility with financial markets by pushing through the tough austerity measures the country needs to stave off bankruptcy.

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