Euro helped by risk appetite, but debt woes cap

LONDON: The euro and high-yielding currencies rose on Tuesday, boosted by improved risk appetite after Chinese data eased global growth concerns and taking a hike in Chinese banks' reserve requirements in their stride.

Traders said the single currency looked a sell on rallies, however, owing to Greece's debt crisis and uncertainty over how much the private sector will be involved in a new aid package for Athens.

China raised banks' reserve requirements by 50 basis points, a move that saw the Australian dollar shed some of its earlier gains and weighed marginally on the single currency.

Chinese inflation surged to its highest in 34 months, and taken together with the reserve requirement hike, analysts said the authorities there were trying to engineer a soft landing for the economy. That could benefit risk in the near term, with European stocks holding on to solid gains while US stock futures pointed to a firm start.

"There is no doubt the Chinese are trying to engineer a soft landing for the economy," said Gavin Friend, currency analyst at NAB Capital. "Risk appetite is supporting the euro but what it really needs is a quick resolution to the Greek debt crisis for a push higher."

The euro hit a session high of $1.4473 on the EBS trading platform before easing back to $1.4432, up 0.1 percent for the day. Traders said sovereign accounts were selling above $1.4450.

Technical traders said the break back above the 55-day moving average at $1.4405 was a positive sign, while next resistance was at $1.4508, the 50 percent retracement of this month's sell-off.

The euro managed to climb as euro zone finance ministers meet to discuss on Tuesday how private Greek bondholders should be involved in a second financing package for debt-laden Greece ahead of a self-imposed June 20 deadline for a deal.

But no decisions are expected on Tuesday.

European policymakers struggled to sort out their differences over Greece with the stand-off between German officials and the European Central Bank over the prospect of a "voluntary" debt rollover threatening a resolution.

On Monday, Standard & Poor's slashed Greece's credit rating to CCC, making the country its lowest rated in the world.

"The euro remains a sell on rallies as there is still a very high risk of growth momentum slowing down. Also, problems in the periphery should not be underestimated as Germany will stick to its stance on Greece and there is a risk of technical default," said Manuel Oliveri, currency analyst at UBS in Zurich.

Yields for Greek, Irish and Portuguese 10-year government bonds hit fresh euro lifetime highs on Tuesday as uncertainty over Greece spooked investors.

DOLLAR AWAITS US RETAIL SALES

The market is now turning its attention to inflation figures in other parts of the world, and most importantly to May data on US retail sales for signs on whether the sudden slowdown in the economy is hampering household spending.

"If we get strong US retail sales numbers it could be dollar positive because of the US yield reaction. The dollar would then gain against the yen and the Swiss franc," said Adrian Schmidt, currency analyst at Lloyds Banking Group.

The dollar index, which tracks its performance against a basket of major currencies, dipped to 74.376, off a two-week high of 74.960 struck the previous day.

It was close to flat for the day at 80.14 ye.

The Swiss franc, an outperformer in recent sessions, fell broadly as better risk appetite led investors to book profits in the safe-haven currency.

The euro was up 0.35 percent on the Swiss franc at 1.2108 francs with Barclays saying in a note that the pair was edging towards oversold levels on the weekly RSI charts.

Meanwhile, the high-yielding Aussie was up 0.4 percent at $1.0650, boosted by the better tone for risk and as traders reported strong demand in the $1.0620/30 area.

Copyright Reuters, 2011