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FOREX-Euro eases as short-covering momentum fades

by on July 26, 2012 4:37 am GMT
 

Thu Jul 26, 2012 12:37am 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 gave back some gains
on Thursday from a short-covering rally the previous day, as
persistent worries about Spain’s debt woes cloud the outlook for
the single currency.

The euro dipped 0. 2 percent to $1.21 34, but stayed
above a two-year low of $1.2042 hit on trading platform EBS
earlier this week.

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 now lies.

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
from allowing the 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.”

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 not far away
from a euro era high of about 7.75 percent.

The euro came under renewed pressure after Spain’s heavily
indebted eastern region of Valencia said last week it would need
financial help from Madrid, highlighting t h e dire fiscal straits
of Spain’s regions.

Still, with the euro having slid roughly 9 percent from a
peak hit in May, it may be due for a bounce in the near-term,
said a trader for a major Japanese bank in Singapore.

“There has been a pretty decent move since May…
Timing-wise, it wouldn’t be a surprise if the euro were to rise
toward $1.24 on short-covering,” the trader said.

FED MEETING

The euro’s downside against the dollar may be limited ahead
of next week’s U.S. Federal Reserve policy meeting, 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 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 interests it pays banks on
excess reserves they leave with the central bank.

Speculation about the possibility of the Fed adopting
monetary easing steps next week may strengthen if U.S.
second-quarter gross domestic product data due on Friday comes
in weak, said a trader for a major Japanese bank in Tokyo.

Still, the more likely scenario is for the Fed to take more
time before taking action, given that the central bank just
extended “Operation Twist” in June, the trader said.

The Fed last month expanded efforts to keep long-term
interest rates low by announcing it would buy an additional $267
billion in long-term bonds while selling short-term securities.

T he dollar eased 0.1 percent to 78.1 1 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 t he trader for
a major Japanese bank in Tokyo.

In addition, the dollar has been supported recently by
wariness about potential yen-selling by the Bank of Japan, with
some market players saying that a drop below 78.00 yen may
he ighten wariness ove r possible in tervention.