FOREX-Euro steadies but vulnerable to Cyprus concerns

Wed Mar 20, 2013 9:26am GMT

* Euro struggles on Cyprus uncertainty

* Single currency hovers near Tuesday's four-month low

* British budget in focus, after BoE minutes

* Fed meeting and Bernanke watched for hints on QE

By Anooja Debnath

LONDON, March 20 (Reuters) - The euro held firm against the dollar on Wednesday as buyers emerged after the single currency's slide to a four-month low following Cyprus's rejection of the terms of a proposed bailout.

The Cypriot parliament overwhelmingly rejected a proposed levy on bank deposits as a condition for a European bailout on Tuesday, throwing international efforts to rescue the latest casualty of the euro zone debt crisis into disarray and triggering a sell-off in the euro.

However, the general assumption in markets was that policymakers would cobble together a deal to keep Cyprus in the currency bloc.

The single currency was up 0.1 percent at $1.2890, near its 200-day moving average of $1.2876, which could provide near-term support. On Tuesday, it dropped below that support and touched a four-month low of $1.28435 on trading platform EBS.

The shaky recovery in the euro was attributed to buyers emerging on dips and also as short euro positions were seen as over-extended. But strategists said the euro would be capped at around $1.2980 and any uncertainty could push it towards the $1.2700/$1.2660 area.

"The euro hasn't fallen much lower after yesterday as markets in Europe are used to getting a solution at the very last minute, so it isn't completely a risk off environment," said Lutz Karpowitz, currency analyst at Commerzbank.

Karpowitz added that the European Central Bank's assurance that it was committed to providing liquidity to Cypriot banks within certain limits had also helped curb euro losses, but said the present uncertainty would keep the euro vulnerable.

Strategists also said they would continue to sell the euro on any rebounds, limiting gains.

The unprecedented plan to impose a levy on citizens' savings in Cyprus, announced over the weekend, has stirred worries that savers in other, larger European countries might withdraw their deposits. There is also concern that it could be repeated in any future bailouts in the euro zone.

CENTRAL BANK FOCUS

Markets will also keep an eye on minutes of the Bank of England's latest policy meeting and Federal Reserve chief Ben Bernanke's news conference after its meeting later in the day.

British finance minister George Osborne's budget at 1230 GMT and possible changes in the BoE's remit to allow more leeway on inflation targeting will also be in focus.

Sterling was down 0.3 percent on the day at $1.5047.

Some in the market are expecting the BoE to signal more stimulus in the coming months. The Fed is expected to keep buying $85 billion a month in mortgage and Treasury bonds in an effort to bolster an economic recovery.

"The core members of the (Fed) committee driving policy are likely to reinforce the message that policy remains highly accommodative for a prolonged period despite the recent improvement in U.S. data, supporting U.S. asset markets," analysts at Morgan Stanley said in a note.

"Hence, we believe that the dollar will remain attractive, not just as a safe haven, but also as an investment destination."

In Japan, the market was wary of any comments from Haruhiko Kuroda, who becomes governor of the Bank of Japan on Wednesday. Expectations are high that the BOJ will embark on a much more aggressive monetary policy to fight deflation.

The dollar was up 0.2 percent against the yen at 95.35 while the euro was up 0.2 percent at 122.85 yen .