SYDNEY The euro was pinned near four-month lows against the U.S. dollar in Asia on Wednesday after Cyprus' rejection of bailout terms seemed to threaten default or even expulsion from the euro zone.
The general assumption in markets is that the European Union, as so often before, will hash out a last minute deal that keeps Cyprus in the single currency.
"The wider implications for the Eurozone were Cyprus to leave are really quite far reaching and it would make sense to see if some form of compromise deal can be reached," said Brian Martin, a senior strategist for ANZ in London.
"However, we cannot read this outcome as anything but negative for the euro," he added. "We recommend staying short the euro vs JPY, CHF, GBP and USD. Peripheral bond spreads should widen further as fears over contagion grow, particularly around Greece."
The euro was indeed looking unloved at $1.2862, having been as low as $1.2843 overnight after breaking key support around $1.2870, its 200-day moving average.
Further losses were prevented only after the European Central Bank said it was committed to providing liquidity to Cypriot banks within certain limits.
All this uncertainty kept the yen supported in its traditional role as a safe haven. The euro was off at 122.27 yen, while the dollar was a shade softer at 95.07.
Yet market will also be wary of any comments from Haruhiko Kuroda, who becomes governor of the Bank of Japan on Wednesday. Expectations are high that Kuroda will quickly embark on a much more aggressive monetary policy to fight deflation, perhaps even before the next scheduled policy meeting in early April.
Japanese markets are shut for a holiday on Wednesday but there is talk Kuroda could call a special policy meeting for next week.
The euro even fell against the ailing pound, hitting a five-week low near 85 pence. It was last at 85.21 with major support a long way down at the February trough of 84.44.
Still, sterling itself may come under pressure later in the day as the British government delivers its budget. There is much talk Chancellor George Osborne could soften the Bank of England's inflation-fighting remit in order to spur growth.
The prospect of yet more asset buying by the BoE could see sterling resume its decline, particularly against the U.S. and Australian dollars.
The dollar index .DXY, which measures the greenback against a basket of currencies, was up 0.4 percent at 83.026, not far from a seven-month peak of 83.166 set on Thursday.
Investors should also remember that a two-day U.S. Federal Reserve policy meeting ends on Wednesday, with an update to economic forecasts and the first news conference of the year from Chairman Ben Bernanke.
As ever, the market will be hyper sensitive to any hint on when the Fed might consider slowing its asset buying plans.
"The tone of Bernanke's press conference is likely to be similar to his recent speeches -- encouraged by the improvement in recent data but cautious about the outlook and content that the effect of the ongoing asset purchase program continues to be a net positive for the economy, despite risks related to financial market stability," wrote analysts at Barclays.
(Reporting by Wayne Cole)
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