Wednesday, May 5, 2010

DJ Euro Sinks Further, Contagion Fears Remain

LONDON (Dow Jones)--The euro sank to new one-year lows under $1.30 Wednesday as Greece was paralyzed by a national strike, and fears of contagion continued to drive the cost of credit default swaps higher.

European stocks were also reflecting negative market sentiment. Most major bourses started the day more than 1% lower but then rebounded to trade nearly flat.

Elsewhere, the dollar benefited from the prospects of more strong U.S. data later in the day, while the pound came under pressure as Thursday's general election in the U.K. could still result in a hung parliament.

The EUR110 billion Greek bailout announced Monday appears to have accelerated the decline of the single currency rather than provide any support.

See the euro's latest slide:

Although Spanish Prime Minister Jose Luis Rodriguez Zapatero dismissed rumors that his government is now negotiating its own debt bailout, investors remain unconvinced.

"Even if the situation of state finances in Portugal and Spain are not remotely comparable with the situation in Greece, it is becoming increasingly obvious that the aid for Greece has solved a short term problem while longer term issues may not have been banished," warned the currency strategy team at Commerzbank AG.

Sentiment certainly isn't being helped by the national strike in Greece, which highlights the difficulties the government faces in implementing austerity measures needed to achieve its debt obligations.

As the Commerzbank strategists said, there has been no fall-back plan outlined by the euro-zone for if Greece fails to meet those obligations.

"So far the euro group has not commented clearly on this matter and the optimism among European politicians and the ECB that Athens will be successful is being interpreted as a means to an end," the bank said.

In the meantime, the cost of insuring debt against default continued to rise with the price of credit default swaps on Greek debt rising 20 basis points to 725 and the price of Spanish ones rising 15 basis points to 225.

The latest euro-zone data didn't help sentiment either. Retail sales for March were unchanged on the month instead of rising by 0.4% as expected. February's sales were revised, however, to a fall of 0.2% from a decline of 0.6%.

The euro was coming under additional pressure against the dollar as U.S. data continues to point to a recovery.

Data due later Wednesday is expected to reinforce this view with the latest Institute of Supply Management index for service industries due to rise to 56 for April from 55.4 in March.

Likewise, the latest private-sector employment survey from ADP is forecast to show a 20,000 rise last month after a 23,000 decline in March. This is likely to increase expectations of a strong non-farm payrolls figure on Friday.

The pound, meanwhile, was largely unchanged as opinion polls indicate that there is still a high risk of a hung parliament in the U.K. after general elections on Thursday. Although the Conservative Party has edged ahead slightly, chances are that it might still need the support of the Liberal Democrats in order to command a working majority in the House of Commons.

By 0930 GMT, the pound was trading virtually unchanged at $1.5156 compared with late in New York Tuesday, according to EBS.

The euro was down at $1.2977 from $1.3001 but was up at Y122.86 compared with Y122.71.

The dollar rose to Y94.62 from Y94.40 and was up at CHF1.1037 from CHF1.1019.


-By Nicholas Hastings, Dow Jones Newswires; 44 20 7842 9493;

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