FOREX-Spain budget lifts euro but gains seen limited

by on September 28, 2012 8:40 am BST

Fri Sep 28, 2012 4:40am EDT

* Spain’s budget soothes market, lifts euro

* Gains may be limited with Moody’s review on Spain due

* Uncertainty over Spain aid request remains

* Dollar falls to 2-week low versus yen

By Jessica Mortimer

LONDON, Sept 28 (Reuters) – The euro rose against the dollar
on Friday, recovering from a two-week low, after Spain unveiled
a budget that many saw as laying the groundwork for an
application for financial aid.

Analysts said the euro’s gains may be limited as long as
uncertainty persisted over when and whether Spain will request a
bailout. Longer-term, concerns Spain would be unable to
implement its budget plans and bring down its deficit could
weigh on the single currency.

A bailout request by Spain is a precondition for the
European Central Bank 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.

The euro was up 0.15 percent at $1.2929, one cent
above Thursday’s two-week low of $1.2828. More gains could see
it target last week’s peak of $1.31729.

“Risk appetite is coming back after the Spain budget,” said
Dag Muller, technical analyst at SEB, but he did not expect it
to last. “It will translate into a fresh high for euro/dollar
beyond $1.3173 and then the market will start to wobble”.

Madrid announced a detailed plan for economic reforms and a
budget based mainly on spending cuts rather than tax measures,
in what many analyst saw as an effort to pre-empt the conditions
for a bailout.

The euro is up 2.1 percent on the quarter, thanks largely to
expectations that Spain’s borrowing costs will be brought down
when the ECB starts buying Spanish debt.

Trade on Friday was expected to be impacted by month-end
rebalancing flows. Citi said they would be negative for the


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, while the Spanish government is also due to publish its
full evaluation of the banking sector on Friday.

“I expect the euro to gradually decline. There’s a risk of
credit downgrade on Spain. The talk between Greece and the
troika may get nowhere. And the euro zone economy will be
fragile,” said Minori Uchida, chief currency analyst at the Bank
of Tokyo-Mitsubishi UFJ in Tokyo.

On Thursday, ratings agency Egan-Jones cut Spain’s sovereign
rating further into junk status, citing the country’s banks and
struggling regional governments.

The euro faces chart resistance at $1.2960, the 38.2 percent
retracement of its Sept. 17-27 slide. The 200-day moving average
around $1.2825 is expected to serve as solid support, however.

“It’s positive that Spain is laying the groundwork for a
bailout. But we still hear disharmony between the euro’s
‘northern league’ and the south,” said Ayako Sera, senior market
economist at Sumitomo Mitsui Trust Bank in Toyko.

The Spanish budget goes to parliament on Saturday and
debates could last weeks. Spain’s 17 autonomous regions still
must present budgets and find an additional 5 billion euros in
adjustments to meet overall public deficit reduction goals.

The euro rose 0.1 percent to 100.27 yen,
recovering from Thursday’s two-week low of 99.64.

But the dollar slipped to 77.44, its lowest in two
weeks, weighed down by Japanese repatriation at the end of
financial half year on Sept. 30.