Euro shaken by contagion risks, yen edges higher

SINGAPORE/TOKYO: The euro struggled to find fans in Asia on Thursday, due to renewed fears of contagion in Europe, while the US dollar remained on the defensive as Washington showed no signs of progress in getting a debt agreement.

The dollar and the euro both sagged against the yen after Japanese Economics Minister Kaoru Yosano was quoted by Jiji news agency as saying currency intervention as big as 1 trillion to 2 trillion yen ($13 billion-$26 billion) would be quite difficult.

Yosano also said the focus for Japanese policymakers would be the Aug. 2 deadline to raise the US debt ceiling, Jiji reported, citing the governor of Aichi Prefecture in central Japan.

The impact from the comments attributed to Yosano was limited, however, especially since Finance Minister Yoshihiko Noda is the minister in charge of currency intervention, and not Yosano. Noda reiterated on Thursday that he was closely watching moves in the foreign exchange market.

The dollar eased 0.2 percent to 77.80 yen , hovering near a four-month low of 77.57 yen hit on Wednesday on trading platform EBS, not far from a record low of 76.25 yen struck in March.

Traders say a decisive drop below an option barrier at 77.50 yen could accelerate the dollar's drop against the yen, with stop-loss orders said to be lurking below that level.

The euro dipped 0.1 percent against the dollar to $1.4358 and fell 0.3 percent versus the yen to 111.71 yen

Against the dollar, the euro has support at its 100-day moving average near $1.4328, its 55-day moving average around $1.4311, as well as its July 14 intraday high of $1.4282.

Weighing on the euro were contrasting statements by euro zone leaders which highlighted the fragility of last week's deal to rescue Greece, as well as Wednesday's rise in Italian government bond yields ahead of an auction on Thursday.

"If Italian 10-year government bond yields break above their previous peak and keep rising after climbing above 6 percent, that would be a cause for significant concern," said Junya Tanase, chief FX strategist for JPMorgan Chase Bank in Tokyo.

The euro dipped 0.1 percent against the Swiss franc to 1.1504 after having fallen 0.9 percent on Wednesday, bringing it closer to a record low of 1.1365 franc hit in mid-July on trading platform EBS.

The euro extended its drop against the Australian dollar, and hit a six-month low around A$1.2970 at one point. Euro/Aussie last stood at A$1.2986, down 0.3 percent and adding to its roughly 1.7 percent drop on Wednesday.

DOLLAR SEEN ON DEFENSIVE

The US dollar was seen likely to remain on the defensive against safe-haven currencies as the prospect of a US downgrade is becoming real. Washington lawmakers were showing no progress on raising the nation's debt ceiling ahead of the Aug. 2 deadline.

"The dollar is weakening against the yen and Swiss franc and that will likely continue until we get some sort of resolution," said Gareth Berry, analyst for UBS Investment Bank in Singapore.

Analysts said the dollar's outlook remained downbeat. Market players are worried that the deficit reduction proposals being discussed in Congress may fall short of the budget cuts necessary to avert a US debt downgrade by ratings agencies.

The dollar is likely to enjoy a short-covering rally if the debt ceiling is raised in time to avert a default, but such a bounce could prove short-lived, said Sacha Tihanyi, senior currency strategist for Scotia Capital in Hong Kong.

"I believe that a debt ceiling decision will happen, but it is unlikely that the long term fiscal structure will be changed enough to completely remove the risk of a downgrade," Tihanyi said.

"The dollar short-covering would only be in the immediate vicinity of an agreement, after which I'd expect the bearish... fundamental picture to reestablish itself," Tihanyi added.

The New Zealand dollar edged up to $0.8735 earlier after the Reserve Bank of New Zealand flagged a rate hike as early as September, nearing a 30-year peak of $0.8766 hit on Wednesday.

After trimming some gains, the kiwi stood at $0.8723 , up 0.1 percent on the day.

Copyright Reuters, 2011