Euro backs off 1-month high on dollar short squeeze

TOKYO: The euro was set to snap its six-day winning streak on Tuesday, coming off near one-month highs against the dollar as the greenback was bought back broadly on a flurry of stop-loss buying and short-covering by macro-funds.

Some traders cited talk that US companies such as Pfizer could repatriate dollars earned overseas to take advantage of a proposed US tax break as helping to push the euro below resistance at $1.4500.

Chinese media reports about a possible rate rise in China this weekend, as well as a Moody's report saying the scale of problem loans at local governments in China may be much bigger than previously thought, also weighed on risk appetite and supported the dollar, they said.

Traders also sold the Australian dollar to take out stops just below $1.07 before the Royal Bank of Australia's policy announcement at 0430 GMT, pushing the Aussie as low as $1.0683 . It found some support at its 55-day moving average of $1.0670.

"It's a classic short squeeze in the dollar, but I don't think the recent 'risk-on' trend has changed because of this sharp move," said Tsutomu Soma, a senior manager at Okasan Securities.

"Both the Aussie and euro were overbought, so many players simply wanted to lock in profits made on those rallies," Soma said.

Euro/dollar was down 0.5 percent on the day to $1.4470, after stops were taken out around $1.4480. Analysts say $1.4430-50 will be a crucial support area for the currency.

The common currency rallied 2.5 percent last week -- its best weekly performance since January. It was dealt a brief setback on Monday after Standard & Poor's warned it would treat plans for a rollover of privately held Greek debt being discussed as a selective default.

S&P's warning came after Greece secured a 12 billion euro loan to avert immediate default. However, it still needs a second aid package worth some 120 billion euros, which euro zone finance ministers said it would be finalised by mid-September.

Market players said the euro will likely rebound to consolidate around $1.4500 for a possible retest of the June peak near $1.4700, particularly if the European Central Bank (ECB) delivers a rate hike on Thursday and signals more tightening.

"It's hard to sell the euro aggressively before the ECB meeting, as the ECB is still likely to do more tightening after the July hike as RBA is seen standing pat for now. There will be bids below $1.45," said a trader for a Japanese bank.

DOLLAR REBOUNDS

The dollar index , which tracks the greenback's performance against a basket of major currencies, bounced off one-month lows. It last traded at 74.474, up from Monday's trough of 74.133.

Still, many players remain bearish about the dollar's prospects.

HSBC analysts warned that sentiment for the dollar could deteriorate further as the market focus shifts from Greece to the US debt ceiling.

The US Congress has until Aug. 2 to approve new borrowing and avoid a default.

"During the recent Greek crisis EUR-USD barely broke 1.40 (low 1.3971), and our big concern is that if the market's focus shifts intensely to the US debt problem then the USD could come under severe pressure," they wrote in a report.

"With this in the market's mind, we expect the market will try to sell the USD until the debt ceiling issue is resolved."

Against the yen, the dollar rose 0.2 percent to 80.74 , but remained stuck in its range of 79.80 yen to 81.30 yen seen in the past few weeks. Offers from Japanese exporters are said to be lined up at 81.30 yen.

Among commodity currencies, the New Zealand dollar bounded to its highest since 1981 as bulls drove it through a big buy-stop level, before it slipped into negative territory on the US currency's broad gains.

The kiwi spiked to around $0.8332, helped in part by an upbeat survey of business confidence, before slipping to around $0.8280 .

The Australian dollar got off to a stuttering start this week following a set of disappointing sales and housing data on Monday.

Those data cemented expectations the Reserve Bank of Australia will keep rates unchanged at 4.75 percent at its regular policy meeting on Tuesday.

The Aussie fell to $1.0683 , extending its retreat from a seven-week peak around $1.0790 set on Friday. Still, it hung onto much of last week's 2.8 percent gain.

The Aussie was one of the biggest beneficiaries of improving risk appetite last week on diminishing worries about Greece, but faces a barrage of local data this week, particularly the employment report on Thursday.

Copyright Reuters, 2011