Like A Tired Boxer, Euro Might Need To Retire. By Nicholas Hastings

The euro has tried and tried again to punch through $1.50.

But, like a tired boxer, the single currency looks as if it might have to retire now.

A strong performance in equities may yet ensure some support for the high-yielding euro. But with the U.S. authorities now expressing concern about the dollar's decline, with large dollar short positions looking ripe for covering and with European banks facing an unsettling removal of easy credit conditions, the single currency looks increasingly unlikely to make a sustained break over $1.50.


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This gloomy assessment is already being reflected in the options market, with implied volatilities that suggest movements in the spot market won't be as large as they were in the past.

"The option skew has moved in favour of euro puts to the most significant degree since December, suggesting that the market sees the risk biased towards a bigger slide in the euro," said the currency strategy team at the Royal Bank of Scotland PLC.

The forecast for a softer performance in the euro against the dollar has as much to do with developments in the U.S. as anything else.

After months of essentially benign neglect, U.S. officials have been keen to stress their concern about the dollar's decline. While U.S. President Barack Obama faced criticism from Beijing during his visit to China this week, U.S. Federal Reserve Chairman Ben Bernanke was quick to stress that the central bank "will help ensure that the dollar is strong."

The fact that dollar shorts have also been stretched to high levels in recent weeks suggest that the market could well be ripe for short-covering, making it that much more difficult for the euro to fund the momentum to break and remain over $1.50.

Events in Europe are also conspiring to ensure the single currency loses its punch.

As the European Central Bank starts to reduce liquidity provisions made to help the European banking system through the credit crunch, the problems of the weaker banks within the system are likely to be exposed, bringing a sharp widening in credit spreads.

Hans Redeker, head of global foreign-exchange strategy at BNP Paribas SA, sees this as a major problem for the euro over the longer term.

"The widening credit spread will highlight inner European Monetary Union divergence which in the absence of a central EMU fiscal authority will be a major issue and a long-term EUR negative," Redeker said.

Having said that, Redeker did suggest there could be some short-term help that could push the euro back over $1.50 again: namely, the repatriation of overseas assets that weaker European banks might to have resort to in an effort to bolster their balance sheets once the ECB withdraws its easy credit.

Early Wednesday in Europe, the dollar was drifting in narrow ranges with global sentiment remaining fairly negative. After Tuesday's soft producer price and industrial production data, the Nikkei in Japan lost 0.6%.

By 0745 GMT, the dollar was down at Y89.15 from Y89.30 late on Tuesday in New York, according to EBS. The euro was up at $1.4891 from $1.4869 but fell back a little to Y132.75 from Y132.84.