The euro was steady Wednesday; with bearish investors selling at higher levels as concerns mounted that debt contagion would ensnare Italy and as general unease prevailed about the euro zone before crucial Greek election. Even yields on normally safe-haven German bonds climbed in clear signal that investors are increasingly gloomy about the euro zone. Some cited this as evidence that the rising cost of shoring up the euro zone was taking a toll on Germany’s credit worthiness. Germany is Europe’s largest economy and paymaster and major currencies are likely to take cue from euro zone bond yields, traders said. If Italian and Spanish bond yields continued to edge up towards unsustainable levels of around 7%, the euro could come under more pressure in the near term. On the other hand, if bond yields eased, it could provide some temporary relief to the euro.
The euro was flat on the day at $1.2522, well above its near 2 year low hit on June 1 at $1.2288 but below its three week high reached on Monday at $1.2672. It rose past reported offers from sovereign investors around $1.2520 with stop losses triggered on its move to a session high of $1.2539. Near term resistance is eyed at the 21-day moving average around $1.2551. There is a risk that the Spanish problems could spread to Italy and investors are mindful of that. The risks are asymmetrical against the euro and while only a bout of short covering can lift the euro, this would suggest investors fade into that rally. Investors and speculators have added to significantly high bearish bets against the common currency in the past few months as the euro zone crisis swept across much of Europe. The euro has fallen more than 7% from the peak of 2012 hit in February and few see the situation improving any time soon with no credible policy response in sight. Analysts say unless euro zone policy makers take steps towards a more cohesive fiscal union and put its banking system in order, bearish sentiment towards the euro will stay entrenched. Concerns over the outcome of Greek elections at the weekend , where parties opposing and supporting harsh austerity measures imposed by the country’s international lenders are neck and neck in public opinion polls, led some investors to remain on the sidelines. Meanwhile Italy faces a test on Thursday when it plans to offer up to 4.5 billion euros of fixed rate bonds. The sale comes as 10 year Italian bond yields have surged past 6%, undermining confidence in the ability euro zone’s third largest economy to undertake austerity reforms.