FOREX-Euro hurt by report of challenge to ECB plan

by on September 25, 2012 11:11 am GMT

Tue Sep 25, 2012 7:11am EDT

* Bundesbank checking legality of ECB bond-buying- report

* Euro may target 200-DMA at $1.2827

* Spain, Greece worries weigh on euro

By Jessica Mortimer

LONDON, Sept 25 (Reuters) – The euro fell on Tuesday on a
media report that Bundesbank lawyers were checking the legality
of the European Central Bank bond-buying plan, with uncertainty
about when Spain would seek aid set to keep it under pressure.

The euro was down 0.15 percent at $1.2915, having
earlier dropped to $1.2886 on EBS trading platform. Further
losses could see it target the 200-day moving average at
$1.2827. It was also lower against the British pound and the
Swedish crown, reflecting widespread caution among investors.

German tabloid Bild said the issue of whether the ECB’s
plans to buy the bonds of indebted countries violates the EU ban
on direct financing of state deficits could be referred to the
European Court of Justice.

Although some analysts doubted any such challenge would go
ahead they said it highlighted the lack of unity among euro zone

“This is nothing of the magnitude of the German
Constitutional Court decision. But when the euro zone’s most
significant central bank is being sceptical it doesn’t encourage
international investors to be holders of euros,” said Jeremy
Stretch, head of currency strategy at CIBC.

The euro was also weighed down by Spain dragging its feet
over requesting an international bailout — a condition for the
ECB to begin buying its bonds. Until Madrid puts in the request,
analysts say the euro is likely to weaken.

Last week, the euro hit a 4 1/2-month peak of $1.31729 on
optimism resulting from the ECB plan and after the U.S. Federal
Reserve announced aggressive quantitative easing.

“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.

The euro was down 0.2 percent at 100.40 yen,
having dropped to 100.185 yen, its lowest since Sept. 13.


Worries about whether Greece’s can meet its targets under
the bailout agreement also weighed on the euro. With the
financing gap estimated at double what was initially expected,
Greece may seek a rollover of its ECB-held bonds as a possible
option, a deputy finance minister said.

This week, Spain is expected to unveil structural reforms
and its draft budget for 2013, with investors also awaiting
results of stress tests on its banks. A Moody’s credit rating
review of Spain is also expected, and this could see Spanish
debt downgraded to “junk”.

“The news out of the euro zone has been negative in the past
few days and while it has contributed to a move lower, investors
are reluctant to go short against the euro,” said Stuart Frost,
head of Absolute Returns and Currency at fund managers RWC

“We are neutral about the euro. It can fall below $1.28
before recovering. But we would sell into any rise towards

Meanwhile, concerns remained about economic fragility in
Europe’s stronger states and kept alive chances of an interest
rate cut by the ECB in the near term.

The dollar was down 0.1 percent at 77.80 yen, moving
back towards the Sept. 14 low of 77.46 yen with inflows before
the end of the financial half-year helping the Japanese
currency. The dollar 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.