Euro rises in London

The euro rose against the dollar on Tuesday, boosted by relief among investors that Italy managed to sell government bonds to the market even though it was forced to pay record high auction yields. It trimmed gains after the European Central Bank failed to attract enough deposits from banks required to offset its purchases of bonds from debt-ridden eurozone countries as a continuation of such a shortfall would in effect be a form of quantitative easing.
Traders were also sceptical of the euro's earlier gains as while the auction showed Rome remains able to borrow from the market, its funding problems are far from being solved as the eurozone debt crisis deepens. Italy managed to sell 7.5 billion euros in three- and 10-year government bonds, although it was forced to pay a yield of nearly 8 percent to borrow through 2014, a level seen driving its financing costs to unaffordable levels in the longer term.
Despite such a dangerous borrowing situation, analysts said the euro had rallied on relief Rome was able to sell the bonds at all. Some investors had been concerned about a lack of buyers after weak demand at a German auction last week. "Market expectations (of the auction) were very low. The market is very short euros going into month-end so I am not surprised by the move," said George Saravelos, G10 FX strategist at Deutsche Bank. The euro rose nearly 1 percent on the day to a session high of $1.3442 after hedge funds initially drove the single currency higher, prompting broad buying.
But the single currency relinquished much of its gains after the ECB attracted 194 billion in euros in seven-day bank deposits, falling short of the 203 billion needed to offset its bond purchases. Market participants said the shortfall was the first since May.
Investors took this to mean the central bank had effectively initiated a round of quantitative easing as it appeared the central bank had increased the amount of euros in the market, which would cut demand for the currency. The euro showed little reaction to a report on French newspaper La Tribune's website saying Standard & Poor's could change the outlook for France's triple-A rating to negative within the next 10 days.
The Australian dollar climbed nearly 2 percent to US $1.0078, before pulling back to US $1.0011 after it was unable to break above technical resistance seen around the 21- and 55-day moving averages around US $1.0096-8. The dollar fell broadly, falling 0.4 percent versus a currency basket, as earlier gains in the euro had dragged most other major currencies higher against the safe-haven US currency. Against the yen, it slipped 0.2 percent to 77.77 yen.