FOREX-Euro weak after Italy slips into recession, Ukraine tensions rise

Reuters

(Updates with New York prices, adds comment, background, changes dateline previous LONDON)

* Euro at nine-month low vs dollar

* Dollar index hits 11-month peak

* Sterling hit by weak industrial data

* NATO says concerned about threat of Russia entering Ukraine

By Daniel Bases

NEW YORK, Aug 6 (Reuters) - The euro hit a fresh nine-month low against the dollar on Wednesday after Italy said it fell into recession again in the second quarter, June German industrial performance slumped and investors grew more cautious over the conflict in Ukraine.

The dollar reached an 11-month high of 81.716 against a basket of major currencies, boosted by a move by investors away from currencies seen as higher-risk, amid reports Russian troops had gathered on the Ukrainian border.

Around 20,000 Russian troops massed on Ukraine's eastern frontier were creating a "dangerous situation", NATO said on Wednesday. It warned that Moscow could use humanitarian concerns as a pretext to send troops across the border.

That, as well as the data showing Italy's economy unexpectedly shrank in the second quarter, drove the euro as low as $1.3331, its lowest since early November.

"It's difficult for some investors to be short Russia, because of liquidity reasons, which effectively encourages proxy selling of euros as concerns grow about a further escalation of those tensions between the West and Russia," said Valentin Marinov, head of European G10 currency strategy at Citigroup.

"All of this is adding to the headwinds of an already weak recovery in the euro zone, encouraging bets on more aggressive European Central Bank easing, weighing on the euro."

German industrial orders fell at their steepest rate in almost three years in June. One reason seemed to be companies becoming more cautious about taking on contracts as geopolitical tension escalated. Another was weaker euro zone demand.

The European Central Bank will hold its next rate policy meeting on Thursday.

Tied into the euro's weakness in recent weeks has also been the drop in equities prices globally, but for European funds in particular. According to Lipper, a Thomson Reuters service, U.S.-domiciled equity funds investing in Europe have had a string of seven straight weeks of net outflows.

"Since June of last year we have seen U.S. money investing into the euro zone and as markets start to take profit and are heavily skewed in terms of positioning the outcome is pressure on European assets and downward pressure on the euro against the dollar," said Sebastian Galy, senior currency strategist at Societe Generale.

Another positive for the dollar was a bigger-than-expected narrowing of the June U.S. trade deficit as petroleum imports fell to a 3-1/2 year low.

Sterling slipped after the UK reported that industrial and manufacturing output grew less than expected in June, cooling expectations the Bank of England will raise interest rates this year.

The pound fell to a session low of $1.6819 before recovering to $1.6836, down 0.30 percent.

A two-day meeting of the BoE's rate-setting Monetary Policy Committee begins on Wednesday, but investors won't know until later in August to see if any members advocated a rise in rates.

The dollar slid 0.22 percent to 102.37 yen, holding above its 200-day moving average. The euro held near a two-week low of 136.40 yen.

(Additional reporting by Jemima Kelly in London, Masayuki Kitano in Singapore and Ian Chua in Sydney; Editing by Larry King and Meredith Mazzilli)

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