By V. Phani Kumar, MarketWatch
MADRID (MarketWatch) — The euro rose against the dollar and other major currencies Monday as news of Cyprus’s bailout agreement with its international lenders eased worries of its exit from the common currency bloc and led investors to take on more risk.
The euro EURUSD +0.51% climbed to $1.3011 in late morning European trade, up from $1.2983 in North America late on Friday, cheering an announcement by the Eurogroup earlier in the day. Read full story on the agreement.
In trade against the Japanese currency, the common currency EURJPY +0.87% was fetching ÂĄ122.80, up from ÂĄ122.56 on Friday.
Despite the relief rally in risk assets on Monday, several analysts remained wary about the implications from the agreement.
“This deal calls into question the safety of bank deposits, as the next time one of these countries asks the European Central bank for funding, the bank could come back and tap them on the shoulder with a similar deal Cyprus has now agreed to,” said Evan Lucas, a strategist at IG Markets.
“Risk premiums will increase on this deal, as will market fragmentation [...] this Band-Aid deal will have ramifications,” he added.
The broad terms of the agreement cleared the path for Cyprus to receive up to €10 billion, while sparing depositors with less than €100,000 in their bank accounts from any losses.
The Eurogroup also announced a restructuring of the two largest Cypriot banks, with the Popular Bank of Cyprus — also known as Laiki Bank — to be split into a “good” and a “bad” bank.
The good bank will then be folded into Bank of Cyprus, along with all of its insured deposit accounts of under €100,000 and all performing assets. Deposits of more than €100,000 would be retained in the residual, so-called bad bank. Details of how much of a haircut larger deposit-holders would have to take weren’t disclosed.
“Cyprus may be too small to matter much economically to the euro area, but the events around the bailout are significant and contagion remains a risk,” Michala Marcussen, global head of economics at Societe Generale, wrote in a note to clients.
Also on Monday, Moody’s Investors’ Service said the crisis in Cyprus had negative implications for credit ratings of the region’s sovereigns.
“Even if negotiations are successful and Cyprus remains within the euro area, policy makers’ recent decisions raise the risk of deposit outflows, capital flight, increased bank and sovereign-funding costs and broader financial market dislocation,” Moody’s said in a statement.
Meanwhile, the ICE dollar index DXY -0.11% , which gauges the greenback’s performance against six major global units, fell to 82.323 as compared with 82.387.
The WSJ dollar index XX:BUXX -0.07% , a measure of the currency against a slightly wider basket, eased to 73.12 from 73.16.
Among other major currency pairs, the British pound GBPUSD -0.17% was trading at $1.5216 as compared with $1.5229, while the Australian dollar AUDUSD +0.30% rose to $1.0471 from $1.0446.
Varahabhotla Phani Kumar is a reporter in MarketWatch's Hong Kong bureau. Follow him on Twitter @MktwKumar.
