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FOREX-Euro dips as short-covering rally falters

by on July 26, 2012 1:47 am GMT
 

Wed Jul 25, 2012 9:47pm EDT

* Euro faces short-term resistance near $1.2184

* Dollar/yen dips, Japan importers may lend support

* Dollar gains may be limited before Fed meeting next week

By Masayuki Kitano

SINGAPORE, July 26 (Reuters) – The euro inched lower on
Thursday giving back some of its gains from a short-covering
rally the previous day, its outlook clouded by persistent
worries about Spain’s debt woes.

The euro rose on Wednesday after European Central Bank
Governing Council member Ewald Nowotny said he could see grounds
for giving the euro zone bailout fund a banking license that
would increase its crisis-fighting firepower.

But ECB President Mario Draghi has poured cold water on the
idea, while legal problems could also prevent the central bank
allowing its European Stability Mechanism rescue fund to tap
liquidity operations.

“The fact is the ECB is still quite divided on the issue of
giving the ESM a banking license,” said Mitul Kotecha, head of
global foreign exchange strategy for Credit Agricole in Hong
Kong.

“I think if anything, any bounce that this has induced would
be short-lived. I don’t see the euro sustaining gains.”

The euro dipped 0.2 percent to $1.2137, pulling away
from the previous day’s intraday high near $1.2170.

The single currency is likely to face additional resistance
near $1.2184, where the tenkan line on the daily Ichimoku chart
now lies, said a trader for a major Japanese bank in Tokyo.
Ichimoku charts are a popular technical analysis tool.

That level also marks the 50 percent retracement of the
euro’s drop from a July 19 peak of $1.2325 down to a two-year
low of $1.2042 hit on trading platform EBS earlier this week.

Sentiment toward the euro remains bearish given spiralling
Spanish borrowing costs that have fuelled concerns the country
will need a full sovereign bailout.

The Spanish 10-year government bond yield fell to roughly
7.40 percent on Wednesday, but is still at levels
that are deemed as unsustainable, and is not far away from a
euro era high of about 7.75 percent.

The euro has support at its 200-month moving average roughly
around $1.2025. A break below that level and the psychologically
important $1.20 level could open up a test of the euro’s June
2010 low near $1.1875.

FED MEETING

While the euro may struggle to head higher, the its downside
against the dollar may be limited ahead of the U.S. Federal
Reserve’s policy meeting next week, said Credit Agricole’s
Kotecha.

“I think the dollar will find it difficult to make gains,
given there is growing speculation that the Fed might take some
action next week,” Kotecha said.

The dollar index, which measures the greenback’s value
against a basket of major currencies, stood at 83.66, not
too far from a two-year high of 84.10 struck earlier in the
week.

Against the yen, the dollar held steady at 78.13 yen,
hovering near a seven-week low of 77.94 yen set this week.

Dollar demand for Japanese importers may emerge at levels
below 78.00 yen and help support the dollar, said a trader for a
major Japanese bank in Tokyo.

In addition, the dollar has been supported recently by
wariness about potential Japanese yen-selling intervention, with
some market players saying that a drop below 78.00 yen might
intensify market jitters.