Euro selling takes a breather, but weak bias persists

NEW YORK: The euro climbed against the dollar on Wednesday, bolstered by comments from the European Commission about the possibility of joint euro area bonds that could help ease the region's debt crisis.

Investors are now looking to a conference call later on Wednesday between Greek Prime Minister George Papandreou, French President Nicolas Sarkozy and German Chancellor Angela Merkel, at which market participants are hoping to get strong reassurances Greece won't default on its debt.

The euro remained vulnerable though to a drop towards recent lows and some analysts reckoned it would be a struggle to get back above $1.3850.

Lane Newman, director of FX trading at ING Capital Markets in New York said even though the euro is currently trading around $1.37, "it is very much on the backfoot."

He added that "there is a lot of position-liquidation going on," in almost all currencies and the euro was the first to go down as a result. The recovery in the euro, which has fallen 10 big figures over the last week, doesn't really change its bearish outlook, Newman said.

"The question is whether the euro zone bailout fund has enough money to preserve countries such as Germany, France, and Spain, when you take into account the costs to restructuring Greek, Portuguese, and Irish debt."

The euro rose after European Commission President Jose Manuel Barroso pledged the Commission would soon publish a long-promised study on introducing euro area bonds, viewed by some as a potential solution to sovereign debt concerns.

Although the comments boosted riskier assets including stocks, market players remained wary after Barroso warned the move would not put an end to the crisis. Germany also remains firmly opposed to any such move.

In midday New York trading, the euro was up 0.2 percent at $1.37110. Demand from leveraged investors and some Eastern European names pushed the single currency to a session high of $1.37480, market players said.

Gains, however, were capped by offers above $1.3730-50, and the euro was seen vulnerable to a test of Monday's seven-month trough at $1.34949.

The single currency dropped to New York session lows after the Austrian finance minister said the country's lower house can't vote on changes in the euro zone bailout fund. However, the euro bounced off lows after the Austrian official expressed confidence that the aid facility will eventually get parliamentary backing.

Moody's downgrade of Societe Generale and Credit Agricole had a limited impact on the euro as the move had been widely anticipated.

US CONCERN OVER EURO ZONE

US Treasury Secretary Timothy Geithner, who will attend a meeting of EU finance ministers in Poland on Friday, expressed confidence in the ability of euro zone leaders to resolve their debt crisis.

But focus will switch back to the US dollar next week when the US central bank's Federal Open Market Committee meets, with any hints policymakers are considering another round of quantitative easing likely to weigh on the dollar.

US economic data on Wednesday did little to suggest the Fed is veering away from further monetary easing as retail sales and producer prices showed zero growth in August.

The dollar index was flat at 76.974.

Investors continued to sell the Australian dollar where there was heavy concentration of long positions. The Aussie dollar was down 0.8 percent at US$1.0234. It has fallen for five straight days and is down more than 5 percent over the last nine.

The dollar edged lower versus the yen to 76.700, within the 76.40/77.85 range of the last three weeks. Investors remained wary of possible intervention by Japan to weaken the yen, after the Swiss National Bank set a minimum target exchange rate in the euro versus the franc last week.

Copyright Reuters, 2011