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FOREX-Euro slides for 2nd straight week as Spain woes persist

by on September 28, 2012 8:56 pm BST
 

Fri Sep 28, 2012 4:56pm EDT

* Euro seen weighed by possible Moody's review on Spain debt
    * Uncertainty over Spain aid request remains
    * Spain stress test shows banks need extra 59.3 bln euros
    * Euro faces chart resistance at $1.2960

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Sept 28 (Reuters) - The euro fell against the
dollar on Friday, closing out a second straight week of
declines, as uncertainty persisted about Spain's bailout
prospects despite a generally positive audit report on the
country's struggling banks.
    An independent audit from consultancy Oliver Wyman released
on Friday showed that Spain's banking industry would need 59.3
billion euros in additional capital to cope with a serious
economic downturn. Spain, however, said it would only ask for 40
billion euros in European aid for its banks. 
    European governments have allotted a 100-billion-euro credit
line for Spain's banking sector.
    The audit report was viewed as positive because the final
figure on the country's banking capital needs was largely in
line with market expectations, removing another layer of
uncertainty.  
    The euro did trim losses versus the dollar following the
news on the bank audit report, but the general stance on the
common currency remained cautious.
    "There's still a lot of questions about Spain, mainly
related to whether or not it would seek a bailout," said Brian
Kim, currency strategist at RBS Securities in Stamford,
Connecticut.
    "Overall, there are a lot of implementation risks in terms
of all the measures committed by European policymakers to deal
with the euro zone crisis."
    In late afternoon trading, the euro was down 0.5
percent at $1.2846, not far from Thursday's two-week low of
$1.2828. The euro faces resistance at $1.2960, the 38.2 percent
retracement of its Sept. 17-27 slide, while the 200-day moving
average around $1.2825 is expected to serve as support.  
    For the week, the single currency was down 1.0 percent
against the dollar, after losses of 1.1 percent the previous
week. It was the largest two-week loss for the euro since
mid-July.
    But the euro fared better against the greenback in September
and appreciated 1.5 percent for the quarter.
    The gains largely reflected diminished debt crisis fears
following assurances made during the summer by European Central
Bank President Mario Draghi that the ECB would do whatever it
takes to preserve the euro. 
    Also helping the euro this quarter was the ECB's
announcement this month that it would buy bonds from heavily
indebted countries.
    Analysts, however, said the euro's gains may be limited.
Longer term, concerns that Spain would be unable to implement
its budget plans and bring down its deficit could weigh on the
common currency.
    Madrid on Thursday announced a detailed plan for economic
reforms and a budget based mainly on spending cuts rather than
tax measures, in what many analysts saw as an effort to pre-empt
the conditions for a bailout. 
    Barclays Capital analysts said a bailout request from Spain
seemed inevitable, adding that the troubled country may seek aid
at around the European Union summit on Oct. 18.
    A request from Spain is a precondition for the ECB to start
buying its debt to bring down its borrowing costs. Analysts and
traders said this would lift the euro, but Spain has appeared
reluctant to take that step.
    Barclays sees the euro rising to $1.35 in three months, but
said it would be difficult to position for a bounce in the
single currency ahead of a formal bailout request.
        
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    Moody's rating agency is due to review Spain's sovereign
rating by the end of this month and may downgrade it to junk
status. On Thursday, ratings agency Egan-Jones cut Spain's
sovereign rating further into junk status. 
    In addition, much of the euro zone is mired in a recession,
which should keep ECB monetary policy accommodative for quite
some time. A rate cut may be in the pipeline as well, perhaps as
soon as its monthly policy meeting next Thursday, analysts said.
    In other currencies, the yen was broadly weaker. It fell
against the dollar on Friday, after rising for seven straight
sessions. The dollar last traded at 77.98 yen, up 0.5
percent on the day, its largest one-day gain in two weeks.    
    The euro was little changed versus the yen at 100.17 yen
.
    Next week, investors will focus on the U.S. non-farm
payrolls report. A Reuters poll showed economists expect a gain
of 115,000 jobs for the month of September
    Given the open-ended nature of the Federal Reserve's
bond-buying program and its focus on the U.S. labor market, the
outcome of this data will be crucial for the dollar's fate.