Euro tumbles after France rejects EU constitution

The euro fell more than half a cent against the dollar early today after France rejected the European Union constitution in a referendum, throwing doubts over the political future of the bloc.

Preliminary estimates put the "No" vote at 55 per cent, higher than most polls suggested before the referendum overnight (NZT).

While the outcome was not expected to jeapordise the monetary union underpinning the euro zone's single currency or the European Central bank, analysts said it does raise questions about the public support behind the EU.

"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 foreign exchange strategist at JPMorgan Chase in Tokyo.

The euro fell as low as US$1.2510 from around US$1.2580 in late New York trade on Friday before rebounding a tad to trade around US$1.2515, holding above a seven-month low near US$1.2495 hit last week.

The euro slipped about 0.2 per cent against the Swiss franc to 1.5450 and was down slightly against the pound at around 68.70.

Against the yen, the single European currency fell to lows around 135.20 yen from 135.65.

"The sentiment on the euro is still weak. But the euro's fall so far this morning has been not that big," Sasaki said. "The market had already priced in 'No' vote beforehand. I think it's time to buy the euro." Traders had expected the market reaction to be limited, with dealers in both London and New York out of the market for holidays.

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 the woes of struggling economic growth.

Some analysts said the French "Non" to the EU has thrown the euro zone into a political crisis that will weigh on the euro and regional financial markets.

"Euro zone financial markets are going to feel a chill wind right across the board. Euro zone stocks and bonds are not going to be spared," said David Brown, chief European economist at Bear Stearns in London.

But not all agreed that the fate of the EU constitution would have much bearing on euro zone asset markets.

"There's too much fixation on the French referendum," said Stephen Jen, Morgan Stanley's chief global currency strategist, in a research note before the vote.

The dollar has gained the upper hand against major currencies this year as the Federal Reserve's steady lifting of US interest rates has lured funds to the US currency, helping snap its three-year slide.

Last week the minutes of the Fed's May 3 meeting showed policy makers suggested yet more quarter-percentage point rate increases were ahead as worries about building price pressures offset recent signs of slowing growth.

US economic data this week are expected to show a slight moderation of manufacturing activity and solid hiring. (Additional reporting by Hideyuki Sano)

- REUTERS