May 31, 2005
By Justyna Pawlak
Yahoo News
Photo: The euro slumped to a new seven month low point against the dollar after President Jacques Chirac appointed Dominique de Villepin (pictured) prime minister of France after the country soundly rejected the EU constitution. (AFP/Pascal Pavani)
NEW YORK (Reuters) - The euro dropped more than 1 percent to its weakest level against the dollar in seven months on Tuesday after France's rejection of the European Union constitution sparked worries about the prospects for economic reform in Europe.
"The weekend 'No' vote was deemed to be negative for the euro and has sent the euro/dollar into a new trading range. It is quite possible that in the coming weeks we could get as low as $1.20 before the market decides that it has bought enough dollars for the time being," said Michael Woolfolk, senior currency strategist with the Bank of New York.
Analysts say the euro zone needs deep reforms because of its anemic growth and low confidence, but the French vote underscored voters' distrust of a reform drive that could limit social protection.
French President Jacques Chirac on Tuesday named Dominique de Villepin as the new prime minister in an ongoing government reshuffle in the wake of Sunday's referendum.
The euro fell to seven-month lows around $1.2312 according to Reuters data before trimming losses slightly in New York morning trade at $1.2337.
The euro also hit a four-month low against the yen around 133.15 yen.
The euro's initially muted reaction to the French vote on a holiday-thinned Monday turned into a sharp fall on Tuesday, crashing through chart support at $1.2385.
The dollar was up slightly against the yen at 108.12 yen.
Japan's Finance Ministry said it did not intervene in the foreign exchange market in May, as expected.
REFORM DRIVE?
Surveys of euro zone economic, business and consumer sentiment published by the EU Commission on Tuesday showed a deterioration in May, underlining the gloomy attitude in Europe which helped sink the charter in Sunday's French referendum.
They also underlined the need for economic reform and sound policymaking in the bloc.
"It looks like the EU is on its way to becoming a very loose grouping and if the euro is a representation of the bloc then there is little reason to see a strong currency," said Peter Fontaine, currency strategist at KBC in Brussels.
However, some U.S.-based analysts did not view the French vote Sunday as such a bearish development for the eurozone currency.
"I think it is not lights out for the euro. It is a vote for status quo," said David Gilmore, partner with FX Analytics, a consulting firm in Essex, Connecticut.
"It is not an unwinding of progress made to date. Political union was always more an idea than a reality and markets are, I suspect. taking this a bit far," Gilmore said. "At the end of the day (the euro is) probably going to be somewhere south of $1.24 and finding a new trading range," he added.
Voters were likely to deal another blow to the European constitution on Wednesday in the Netherlands, where polls show the "no" camp is likely to gain 60 percent of the votes.
The bad news for the euro contrasts with U.S. economic data this week which are expected to reaffirm the Federal Reserve's steady lifting of interest rates.
"Data we are expecting out of the United States for the next week should be supportive for continued dollar buying," including the widely watched non-farm payrolls report for May, due for release on Friday, Woolfolk said.
But Woolfolk added that there is no evidence that the long- term decline of the dollar has reversed, given the wide U.S. trade deficit and the likely depressive effect on the dollar once China allows its yuan currency to trade more flexibly.
The Chicago PMI index of regional factory and business activity, due at 1400 GMT, is forecast at 62.0 in May compared with 65.6 in April, holding well above the 50 point dividing line to show solid growth.
The Institute for Supply Management's report on manufacturing is due on Wednesday.
(Justyna Pawlak in London contributed to this report)
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