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FOREX-Euro dips as Spain worries keep investors wary

by on July 26, 2012 8:24 am GMT
 

Thu Jul 26, 2012 4:24am EDT

* Spain worries seen weighing on euro despite recent rebound

* Euro faces short-term resistance near $1.2184

* Dollar gains may be limited before Fed meeting next week

By Jessica Mortimer

LONDON, July 26 (Reuters) – The euro gave back some of the
previous day’s gains on Thursday, with persistent worries about
the possibility of Spain applying for a full bailout leaving
investors inclined to sell the currency on any rally.

The euro was down 0.2 percent at $1.2130, edging away
from a high of $1.21705 reached on Wednesday.

Analysts said the euro’s falls may be limited before next
week’s U.S. Federal Reserve policy meeting due to speculation
policymakers could hint at more monetary easing, but high
Spanish borrowing costs were expected to keep investors wary of
buying the currency.

“The only thing that could change the downtrend in the euro
is if the Fed launched further quantitative easing or some other
additional policy measures. Otherwise it’s all about what
happens in the euro zone,” said Richard Falkenhall, currency
strategist at SEB in Stockholm.

“Every time there is a rally in the euro like there was
yesterday it should be used as an opportunity to sell into …
Long-term investors will take every opportunity to cut their
euro exposure.”

On Wednesday the euro recovered from this week’s two-year
low of $1.2042 after Austria’s European Central Bank Governing
Council member Ewald Nowotny discussed the merits of giving the
euro zone bailout fund a banking licence.

Spanish 10-year government bond yields edged down to around
7.40 percent but remained close to their euro era
high of about 7.75 percent and still at levels deemed
unsustainable in the long term.

“I don’t see the euro sustaining gains,” said Mitul Kotecha,
head of global foreign exchange strategy for Credit Agricole in
Hong Kong. “The fact is the ECB is still quite divided on the
issue of giving the ESM a banking licence.”

But with the euro having slid roughly 9 percent from a peak
hit in May, some traders said it may be due for a bounce.

The daily Ichimoku chart, a popular technical analysis tool,
shows resistance for the euro near $1.2184, which is where the
Ichimoku chart’s tenkan line lies.

FED MEETING

The dollar index was up 0.1 percent at 83.586, off a
two-year high of 84.10, with investors slightly wary of buying
before Wednesday’s Fed policy decision.

“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,” said Credit Agricole’s Kotecha.

The Fed’s remaining policy tools include a third round of
quantitative easing in the form of large-scale bond purchases –
known as QE3 – and lowering the interest it pays banks on excess
reserves they leave with the central bank.

Speculation the Fed may adopt monetary easing steps could
strengthen if U.S. second-quarter gross domestic product data
due on Friday is weak, although most expect the central bank to
hold back for now.

The dollar held steady at 78.18 yen, hovering near a
seven-week low of 77.94 yen set this week.

Traders said dollar demand for Japanese importers may help
curb further falls. They also said a drop below 78.00 yen could
heighten wariness about the possibility of Bank of Japan
intervention to curb yen strength.