Investors search for Forex bets on euro break-up risk

Could the European Monetary Union fall apart? Most currency analysts say probably not.

But concerns are growing that persistent economic trouble in the eurozone could encourage more calls to drop the single currency, similar to recent demands for a referendum on the euro from a junior government coalition partner in Italy.

The Northern League's demand to bring back the lira rattled the euro over the last week, helping to bring it to its lowest level in 10 months on a trade-weighted basis.

The single currency was battered after France and Netherlands rejected the vote on European Constitution, raising fears that the monetary union could be at risk without strong political footing.

The euro fell most deeply against the yen, which was also helped by positive news about the Japanese economy, hitting its lowest level in almost a year at 130.65 yen.

Analysts said in the future, there may be other ways for investors to hedge or even profit from any potential damage to the six-year-old euro from fears over cracks in Europe's currency union.

Buying the Swiss franc was one, they said.

"Say things were going to spin out of control, people would pile into the Swiss franc at the expense of the euro," said Paul Mackel, currency strategist at ABN AMRO in London.

"It's a traditional 'safe haven' and old European money would move into Switzerland. The relative cost of this trade, in the options market, is low which makes it attractive."

On Tuesday, the euro traded near its lowest level against the Swiss franc in almost six months, around 1.5308 francs. One-month volatility on the pair traded around three per cent, compared to nine per cent in euro/dollar volatility, eight per cent in euro/yen and five per cent in euro/sterling.

"Euro/Swiss is one of our natural EMU trades, because implied volatility is so low compared to other euro crosses," said Mr Mackel.

The referendums plunged the bloc into crisis and sparked concerns about future policy-making and the lack of political unity which many analysts view as essential for a successful currency union.

Many senior eurozone policymakers, including European Central Bank President Jean-Claude Trichet, have called talk of the EMU falling apart "absurd".

But Italy's Prime Minister Silvio Berlusconi and his Economy Minister Domenico Siniscalco have yet to criticise the Northern League's proposal.

"The risk of a break-up of the EMU... has always been non-negligible," Stephen Jen, chief currency economist at Morgan Stanley in London, wrote in a research note. He added such risk was there even before the failed referendums on the EU charter.

But he said Germany, if any country, could be the "most relevant country to break away from the EMU".

Investors who wanted to bet that problems within the euro would stem from economic woes that could hit all of Europe, would probably sell the euro against the dollar and the yen, rather than investing in any other European currency, some analysts said.

"The strongest candidate is probably euro/dollar. The clear rationale would be to avoid the euro and Europe completely," said Steven Saywell, chief currency strategist at Citibank in London, adding he did not expect the EMU to actually fall apart.

Other analysts also said the yen could be the currency of choice for investors wanting to bet on problems within the EMU.

"If you think there is a possibility of disaster within the EMU but you are still positive on Europe, euro/Swiss would be ok. But euro/yen is more attractive (to sell). There are some good indications coming from Japan," said Marios Maratheftis, currency strategist at Standard Chartered in London.