The euro retreated from a five-month high against the dollar on Monday as concerns over the eurozone banking sector resurfaced.
The single currency rose sharply against the dollar last week as the prospect of further quantitative easing from the Federal Reserve undermined the US currency.
EDITOR’S CHOICE
Market Insight: Towards a new era of currency intervention - Sep-22
Analysis:Japan: Inventive intervener - Sep-22
Lex: Yen intervention - Sep-15
Timeline: Currency interventions - Dec-01
Beijing currency saga returns - Sep-12
But the euro reversed course after ratings agency Moody’s downgraded the debt of Anglo Irish Bank, reinvigorating concerns over the health of Europe’s banks.
Valentin Marinov at Citibank said investors were also likely to focus on the European Central Bank’s refinancing operations later in the week to gauge the liquidity requirements of banks in the eurozone.
“Indications that the liquidity needs have grown of late may put the euro under renewed pressure,” he said.
But Mr Marinov said market positioning suggested that the recent rise in the euro against the dollar might have further to go.
According to positioning data released by the Chicago Mercantile Exchange at the weekend, which is widely used as a proxy for hedge fund activity, speculators shifted to long positions in the euro for the first time since December 2009.
Mr Marinov said, however, that the shift in positioning looked modest compared with the recent rise of the euro.
“This is consistent with other signals that investors have been slow to participate in the euro rally,” he said. “We believe that there remains significant further ammunition for euro buying and that investors may be forced to chase a further rally.”
The euro fell 0.3 per cent to $1.3451 against the dollar, lost 0.4 per cent to £0.9495 against the pound and eased 0.3 per cent to Y113.29 against the yen.
Meanwhile the Swiss franc also lost ground, easing 0.3 per cent to SFr0.9853 against the dollar.
The retreat in the Swiss franc came after the Swiss National Bank reiterated on Friday that an expansionary monetary policy was appropriate and that growth in the Swiss economy could see a “marked slowdown”.
Jane Foley at Rabobank said any lingering fears that the SNB would raise interest rates before the end of the year had been blown out of the water.
“The SNB recently spoke of deflationary pressures in 2011, suggesting that it will be many months before an increase in interest rates will be contemplated,” she said.
“Against this backdrop it looks likely that the euro is in the process of bottoming out against the Swiss franc.”
The Swiss franc was little changed at SFr1.3257 against the euro.
