French referendum result pushes euro lower

05/30/2005

TOKYO (Reuters) - The euro skidded more than half a cent against the dollar on Monday after France soundly rejected the European Union constitution in a referendum that is seen as setting off a political convulsion in the bloc.

The “No” vote garnered 55 percent, much higher than most polls suggested before the referendum on Sunday.

While the outcome was not expected to jeopardise the monetary union underpinning the euro zone’s single currency and the European Central Bank, analysts said it does raise questions about the public support behind the EU and future integration.

“The French referendum does not mean the end of the euro. It just shows there are a lot of things the European Union should do for it to develop further,” said Tohru Sasaki, chief forex strategist at JPMorgan Chase in Tokyo.

Still, analysts said the euro’s recent slide to seven-month lows versus the dollar was mainly being driven by the Federal Reserve’s steady lifting of interest rates further above those in the euro zone and Japan.

For that reason, investors and traders were eyeing reports this week on U.S. manufacturing and the labor market to judge the economy’s strength and likelihood of more Fed credit tightening.

“The real reason for the euro’s weakness is a growing differential in interest rates between the euro zone and the U.S.,” said Osamu Takashima, chief forex analyst at Bank of Tokyo-Mitsubishi.

The euro fell as low as $1.2510 from around $1.2580 in late New York trade on Friday before rebounding to near $1.2535, still down about 0.30 percent.

Analysts said the impact of the referendum result was short-lived as a “No” vote had been largely factored in and due to market holidays in London and New York.

“Investors were already positioned (short on euros and long on dollars) and the result was priced in, so we didn’t see a lot of follow-through,” said Harvinder Kalirai, head of research and analysis at State Street Bank in Sydney.

The single European currency held above a seven-month low near $1.2495 hit last week, just above a key level of technical support at $1.2490, traders said.

The euro slipped slightly against the Swiss franc to 1.5452 and versus the pound to around 68.70.

Against the yen, the single European currency was trading at the day’s low around 135.10 yen after slipping from 135.65. The dollar also dipped against the Japanese currency to 107.79 yen.

Some market participants suspected that the fallout from the referendum would be limited to the euro’s slide early on Monday, and that traders in London and New York were unlikely to push it significantly lower upon their return to the market on Tuesday.

BAD FOR MARKETS?

France’s referendum and another anticipated vote against the EU constitution by the Netherlands on Wednesday have weighed on the euro in the past few weeks, adding to damage to the currency from sluggish economic growth in the euro zone.

While some analysts said the vote result would throw the euro zone into a political crisis that would weigh on the currency and regional financial markets, others said the fate of the EU constitution would have limited significance for investors.

“The question is whether this changes anything in Europe,” said Kalirai at State Street. While acknowledging that the result was “a bit of a setback,” he added that the vote was unlikely to throw the bloc into lasting political disarray.

“It’s a bit of a disappointment but in the longer term, I don’t think it changes much,” he said. (Additional reporting by Hideyuki Sano, Chikako Mogi, Eric Burroughs)