* Euro still smarting from 'Cyprus model' suspicions
* Little sign of contagion to Italy, Spain
* Yen under pressure ahead of April 3-4 BOJ meeting
* Commodity currencies shine on rising risk appetite
By Sophie Knight and Hideyuki Sano
TOKYO, March 27 The euro hovered near a
four-month low against the dollar on Wednesday after a rescue
deal for Cyprus raised fears about financial stability in the
currency bloc, while the yen slipped on hopes of more bond
buying by the Bank of Japan.
Commodity currencies held firm after upbeat data on U.S.
home prices helped to lift U.S. shares, with the Dow Jones
Industrial Average hitting yet another new record and the S&P
500 near its all-time closing high.
The euro dropped 0.1 percent to $1.2852 on Wednesday,
not far from the four-month low of $1.2828 hit on Tuesday.
Against a resurgent Australian dollar, it traded near the
four-month low of A$1.2225 hit on Tuesday, fetching A$1.2276
The common currency is still suffering from suspicions,
following the Cyprus bailout, that bank depositors and bond
holders may be forced to foot the bill in future rescue deals in
the currency bloc.
Jeroen Dijsselbloem, head of the Eurogroup of finance
ministers, raised the idea on Monday, saying that the rescue
plan for Cyprus will serve as a model for resolving future euro
-zone banking crises. He later appeared to backtrack, saying
Cyprus was a unique case, but the damage was already done.
"The euro still has downside risks. You never know what's
coming up next," said a trader at a European bank.
"But some hedge funds are now covering short positions in
the euro and I think the currency may stabilise for now," he
Some analysts say the euro could steady in time for the
Easter holidays this weekend, particularly as there is so far
little sign of dreaded contagion to the euro zone's larger
economies, such as Spain and Italy.
Their debt yields were well within recent ranges, thanks in
part to the European Central Bank's bond buying programme.
However, other analysts said alarm bells could ring if the
two-year German bond yields, currently at 0.005, go negative.
"The euro would likely come under heavy selling pressure if
the yield were to drop below zero, as it didn't even go negative
in the aftermath of the Greek election last year," said Minori
Uchida, senior analyst at Bank of Tokyo-Mitsubishi UFJ.
"If it stays positive, there will be little other downside
pressure on the euro for the moment," he said.
The yield on the two-year German bonds last dipped into
negative territory in December, after doing so for the first
time in July as Spanish and Italian borrowing costs hit crisis
The euro gained about 0.3 percent against the yen to 121.80
yen on Wednesday, as the Japanese currency fell on
reinforced expectations of major stimulus from the Bank of Japan
after the Nikkei business daily said the central bank will boost
bond buying at its policy review meeting on April 3-4.
The news nudged the dollar up 0.4 percent to 94.78 yen
, extending its rebound from a one-week low of 93.53 yen
Commodity currencies also held firm on improved risk
sentiment after U.S. home prices posted their biggest
year-on-year gain in six and a half years in January. This sign
that wounds inflicted by the 2008 financial crisis are healing
helped boost Wall Street shares.
The Aussie lost 0.1 percent to $1.0465, with the
Reserve Bank of Australia's reassurance that the country's banks
are robust and prepared to meet new strict liquidity controls
putting prospects of a rate cut even further out of reach.
Helped by a stellar jobs report on March 14, the Aussie had
rallied 3.8 percent from a 7-1/2 month low on March 4 to a high
of $1.0497 on Tuesday.
While the currency added 4.5 percent in the same period
against the broadly weakening yen, analysts said it will take
equally strong data in April to push the Aussie over strong
resistance at 100 yen. On Wednesday. it fetched 99.11
The Canadian dollar was firm after gaining 0.5 percent on
Tuesday to trade at C$1.0164 per U.S. unit, near
one-month high of C$1.0160 hit on Tuesday.