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FOREX-Euro soars as ECB’s Draghi pledges to save euro zone

by on July 26, 2012 8:24 pm BST
 

Thu Jul 26, 2012 4:24pm EDT

* Euro rises 1 percent to two-week high versus dollar
    * ECB head: Will do whatever needed to save euro
    * Analysts wary of euro rally, Spanish yields near 7 pct


    By Wanfeng Zhou
    NEW YORK, July 26 (Reuters) - The euro headed for its best
day against the dollar in a month on Thursday after European
Central Bank chief Mario Draghi said the bank would do whatever
it takes to protect the euro zone from collapse and preserve the
single currency.
    Speculators pared back their extended short positions in the
euro, lifting it more than 1 percent to a high of $1.2329,
nearly 3 cents above a two-year low set earlier this week.
    Some analysts see further near-term gains, saying Draghi's
comments represented a significant shift in the ECB's policy
stance, but others say any rally is set to fade until the bank
takes real action to ease the euro zone's debt crisis.
    "The market appeared to be primed for any positive
developments from the euro zone," said Neal Gilbert, market
strategist at GFT in Grand Rapids, Michigan.
    "Despite the strong comments by Draghi, the risks of debt
contagion within the euro zone remain," he said. "It probably
won't be very long lasting until the ECB actually takes action
instead of jawboning the market."
    The euro rose to a two-week high of $1.2329,
according to Reuters data, and was last up 1 percent at $1.2282.
It also rallied 1.1 percent to 96.04 yen, moving away
from a 12-year low set earlier this week.
    Speaking to an investment conference in London, Draghi
pledged to do whatever was necessary to protect the euro zone
from collapse, including fighting unreasonably high government
borrowing costs for countries such as Spain and Italy.
 
    "In a heavily biased market, it only takes a little bit of
news of the opposite sentiment to provoke quick moves," said
Christopher Vecchio, currency analyst at DailyFX in New York.
    Vassili Serebriakov, currency strategist at Wells Fargo in
New York, said Draghi sent a "loud and clear" signal that
European authorities are unwilling to tolerate a significant
further rise in the borrowing costs for peripheral euro-zone
countries.
    Spanish and Italian government bond yields fell sharply on
Draghi's comments, although the rally failed to bring 10-year
Spanish yields much lower than 7 percent, which is widely seen
as an unsustainable level in the long run.
    
    U.S. DATA AND THE FED
    Some analysts cautioned the past two days' gains may have
been overdone, noting that the euro could re-test recent lows
and target the psychologically important $1.20 level followed by
2010's low around $1.1875.
    Investors are increasingly worried about the possibility of
Spain applying for a sovereign bailout or Greece leaving the
monetary union.
    Greece has scraped together a plan to save nearly 12 billion
euros over the next two years in an increasingly desperate
effort to convince visiting EU and IMF inspectors it deserves to
be saved rather than pushed out of the euro zone.
.
    The biggest U.S. prime money market funds reduced their
euro-zone exposure to the lowest level since 2006 as fears about
Spain requiring a full-blown bailout intensified, Fitch Ratings
said in a report on Wednesday..
    Investors will likely turn their attention to a report on
U.S. second-quarter growth on Friday and a Federal Reserve
policy meeting next week.
    Data earlier showed the number of Americans filing new
claims for jobless benefits fell last week to nearly a four-year
low, but an unusual pattern for summer factory shutdowns kept
hopes in check that the weak labor market was improving. 
    Other data showed new orders for long-lasting U.S.
manufactured goods rose in June although a gauge of planned
business spending plans dropped, pointing to a slowdown in
factory activity. [ID: nL2E8IQ06N]
    "More evidence that the U.S. economy cannot reach 'escape
velocity' could intensify speculation for more accommodation
from the Fed and help euro/dollar consolidate some more ahead of
next Wednesday," Citigroup strategists wrote to clients.
    "We also think the short squeeze in the euro has further to
run, given that the single currency still looks oversold
relative to fundamentals," the bank said.
    The dollar rose 0.1 percent to 78.20 yen, but fell to
a two-week low against the Swiss franc. The New Zealand
dollar rallied 1.7 percent and Australian dollars 
gained 0.9 percent as risk appetite increased.