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FOREX-Euro slides on Germany comments, dlr jumps pre-G20

Published 03/27/2009, 08:32 AM
Updated 03/27/2009, 09:40 AM

* Euro slides on Steinbrueck's EU fiscal stability remarks

* Dollar rallies broadly on Japan, Russia G20 view

* Euro falls 2 cents intraday to below $1.34

(Adds quote, updates prices)

By Tamawa Desai

LONDON, March 27 (Reuters) - The euro slid sharply on Friday after Germany's finance minister said fiscal irresponsibility in Europe could put the currency at risk, and the dollar drew extra support ahead of next week's Group of 20 leaders' meeting.

The yen rallied broadly on flows related to last-minute fund repatriation by Japanese investors ahead of the annual book-closing on March 31, and expectations for further flows into Japan due to a change in tax regulation.

Senior Japanese and Russian officials said the dollar's status as global reserve currency was unlikely to be discussed at next week's G20 summit in London, cooling some speculation that it would be an issue at the meeting.

That gave the dollar broad support, while German finance minister Peer Steinbrueck's comments, weaker-than-forecast euro zone industrial orders and German state inflation data triggered a huge batch of pre-placed euro sell orders, traders said.

The euro lost more than two full cents on the day to hit a week-low of $1.3296, as selling was exacerbated after falling through technical support at the 200-week moving average of $1.3380.

"The move in the euro is all about the Steinbrueck comments," said Chris Turner, head of FX strategy at ING.

Steinbrueck told the German parliament: "Germany, as a member of the EU, has a massive interest in the credibility of the Stability and Growth Pact, which as you know is not taken so seriously by some."

"If it is not taken seriously, I am telling you, the euro will have trouble one day in terms of its own credibility and stability."

By 1159 GMT, the euro was down 1.5 percent on the day at $1.3320 from an intraday high of $1.3591.

"Moving one and a half big figures (cents) on comments like that earlier from Steinbrueck just goes to show how nervous and irrational the market is right now," said a trader in London.

The euro was down 2.8 percent against the yen at 129.87 yen , while the dollar was down 1.3 percent at 97.46 yen.

The dollar index, a measure of the dollar's value against six major currencies, was up 1.0 percent on the day at 84.970 , having earlier traded down on the day.

EYES ON G20, DOLLAR

Data on Friday showed that euro zone new industrial orders slumped 34 percent year-on-year in January, while German state inflation data ahead of the national figure showed consumer prices falling in March.

The European Central Bank is widely expected to cut interest rates by 50 basis points to 1 percent next Thursday but may also announce further liquidity-boosting measures.

"The spectre of deflation within the euro zone would open the door for the ECB to be more forthright on unconventional policy measures," said analysts at Calyon in a note.

ECB Vice-President Lucas Papademos said on Thursday the ECB could buy private sector bonds in a bid to boost liquidity in the face of a feared "vicious circle" of negative effects.

Meanwhile, the dollar's broad gains were in part fuelled by comments from a senior official at Japan's Ministry of Finance and a senior Russian central bank official that the dollar will remain the world's reserve currency for some time.

The yen was also supported on talk about tax-related bills, expected to be included in a state budget passed on Friday, on a Japanese version of the U.S. Homeland Investment Act, which would allow corporations to repatriate funds held at overseas affiliates free of tax.

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