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Euro sinks on fears of more trouble after Cyprus deal

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(Globalpost/GlobalPost)

The euro lost more than one percent against the dollar Monday after scoring early gains from the 11th hour, 10 billion euro EU-International Monetary fund rescue deal for Cyprus.

After pushing above the $1.30 line in early Monday trade, the euro sank back to $1.2853 at 2100 GMT, compared to $1.2986 late Friday.

The safe-haven yen meanwhile climbed, with the dollar falling to 94.10 yen from 94.46 and the euro to 120.96 yen from 122.72.

Early hopes that the contagion risk had been contained and markets stabilized gave way to fears that Cyprus still faces possible panic when banks reopen Tuesday, and that banks in other weak eurozone economies were also at risk of runs.

That was exacerbated when Eurogroup head Jeroen Dijsselbloem told the Financial Times that the the Cyprus model of penalizing bondholders, shareholders and uninsured deposit holders in bank failures could be applied elsewhere in Europe.

Markets across Europe and in the United States fell after the remarks, sending shares of Spain's Bankia plummeting, even though Dijsselbloem backtracked later, stressing that Cyprus was a unique case.

"The decision to tax savers (in Cyprus) is important because of how the European sovereign debt crisis has flowed: each policy undertaken has set precedence for the next bailout," said Christopher Vecchio of DailyFX.

"If Cypriot savers had to contribute to the bailout of its banks, then why wouldn't the same measures be forced upon Italian and Spanish savers?"

"Investors in weak financial institutions in peripheral Euro-zone countries are on high alert," said Vecchio. "So should euro traders be."

Meanwhile US Federal Reserve chief Ben Bernanke told a London audience that the major economies were not engaging in competitive devaluations despite the impact of their stimulus policies on pressing down their currencies.

Even if the currencies have weakened, he argued that a "return to solid growth among the advanced economies is ultimately in the interest of advanced and emerging market economies alike."

The British pound fell back, to $1.5179 from $1.5233, while the dollar rose on the Swiss franc, to 0.9484 francs from 0.9401 francs.

pmh/ch

http://www.globalpost.com/dispatch/news/afp/130325/euro-sinks-fears-more-trouble-after-cyprus-deal