FOREX-Euro edges up as ECB member defends bond buying plan

by on September 25, 2012 1:58 pm GMT

Tue Sep 25, 2012 9:58am EDT

* Bundesbank checking legality of ECB bond-buying - report
    * ECB official defends legality of buying crisis bonds
    * Euro rebounds from one-week low, may target 200-DMA at
    * Spain, Greece worries weigh on euro

    By Julie Haviv
    NEW YORK, Sept 25 (Reuters) - The euro edged higher against
the dollar on Tuesday, rebounding from a more than one-week low
brought on by a media report that Bundesbank lawyers were
checking the legality of the European Central Bank's bond-buying
    German tabloid Bild said the issue of whether the ECB's
plans to buy the bonds of indebted countries violates the ban in
EU treaties on direct financing of state deficits could be
referred to the European Court of Justice.
    The euro recovered losses after an ally of Germany's
powerful Bundesbank at the ECB defended the new bond-buying 
program. Ewald Nowotny, an ECB governing council member and
Austria's central bank governor, said the ECB was on a firm
footing with its plan to stem the euro zone crisis.
    Senior ECB sources, meanwhile, have said the bank's legal
department studied the legality of bond-buying carefully before
the Sept. 6 decision to launch the program.
    "This is nothing of the magnitude of the German
Constitutional Court decision. But when the euro zone's most
significant central bank is being skeptical it doesn't encourage
international investors to be holders of euros," said Jeremy
Stretch, head of currency strategy at CIBC. 
    The euro last traded at $1.2952, up 0.2 percent,
after dropping to $1.2885, its lowest since Sept. 13. Further
losses could see it target the 200-day moving average at
    The euro should remain under pressure if Spain drags its
feet over requesting an international bailout. This must happen
in order for the ECB to begin buying its bonds and, until it
does, analysts say the euro is likely to weaken.
    Last week, the euro hit a 4-1/2-month peak of $1.3169 on
optimism as a result of the ECB plan and after the Federal
Reserve announced aggressive quantitative easing to boost a
sluggish U.S. economy.
    "In the very short term the 200-day moving average is the
obvious trigger point. If that gives way it could fall to
$1.2760/70 and then we would be back to the pre-ECB rally
levels," CIBC's Stretch said.

    Worries about the size of Greece's deficit also weighed on
the euro, with German's Der Spiegel magazine reporting it could
be 20 billion euros, nearly double previous estimates. 
    "Fears about Europe's situation remain among investors, with
the focus mostly on Spain, but Greece is also still a concern," 
said Kimihiko Tomita, head of foreign exchange for State Street
Global Markets in Tokyo.   
    This week, Spain is expected to unveil new structural
reforms and its draft budget plan for 2013, with investors also
awaiting results of stress tests on its banking sector. A
Moody's credit rating review of Spain is also expected, when it
could downgrade Spanish debt to junk status.
    Meanwhile, concerns remain about economic fragility in
Europe's stronger states. A weaker-than-forecast German business
survey on Monday was followed on Tuesday by a survey showing
French business morale stayed low in September. 
    The dollar pared losses against the yen after U.S. data
showed single-family home prices rose for a sixth month in a row
in July, though the improvement was not as strong as
    The dollar was last down 0.2 percent at 77.72 yen. 
    It hit a one-month high of 79.22 yen on Sept. 19 after the
Bank of Japan announced further monetary easing. 
    Japanese Finance Minister Jun Azumi told reporters he stood
ready to take firm measures on currencies as long as he was
finance minister. He said there would be no vacuum in currency
policy due to his pending departure to take a new position in
the ruling Democratic Party.