Euro steady in short-term but downside risks dominate

LONDON: The euro steadied on Thursday as relief over assurances from Germany and France about keeping Greece in the euro bloc subsided, with the single currency set to stay weak on worries over whether Athens will manage to avoid a debt default.

The euro is under pressure as market players, spooked by fears that a possible debt default in the euro bloc could unleash a major financial crisis, remain ready to sell the currency and risk assets into any rally.

The euro was flat on the day at $1.3755 , off a high of $1.3784 hit on Wednesday after a joint statement from Germany and France helped bolster hopes that Greece will receive the next tranche of aid from the EU/IMF and avoid imminent default.

"The comments from Merkel and Sarkozy have supported sentiment in the short-term but not there's not much scope for a serious improvement in attitudes towards the periphery or overall growth conditions in the euro zone right now," said Manuel Oliveri, currency strategist at UBS in Zurich.

"It's also quite likely the ECB will need to take a more dovish stance so we don't think the euro will stay supported for long," he added.

The euro has been under added selling pressure since the European Central Bank was seen to be shifting away from its previous hawkish stance on monetary policy last week, with some market players seeing potential for a rate cut before year-end.

Risk-reversals, a measure of the premium required to hold a put or a call in a currency, continue to show a strong bias for euro downside, showing the market is concerned about further falls for the single currency.

"There were no new steps, so the conference call did not offer any fresh reason to buy the euro," said Masafumi Yamamoto, chief FX strategist at Barclays Capital in Tokyo, echoing widespread worries over how Greece will meet tough fiscal targets as austerity measures hurt its economy.

Many traders expect the euro to eventually test Monday's seven-month low just below $1.35, while resistance is seen at a previous support point around $1.3835 and then $1.3895, a 38.2 percent retracement of its fall this month.

The euro is also burdened by mounting worries over contagion of the debt crisis to the euro zone's bigger economies.

Speculation is rife that Moody's might downgrade its rating on Italian debt soon as it is almost 90 days since the US agency said it may cut the Aa2 rating.

Also attracting attention is Spain's debt auction later in the day. Spain is expected to pay a heavy premium to borrow up to 4 billion euros via three bond issues after Italy had to pay the highest interest rates in the euro era to sell five-year debt on Tuesday.

This will be followed by an informal meeting on Friday of euro bloc finance ministers.

EUROPE FALLOUT

The Australian dollar was down 0.3 percent to $1.0232 , near a one-month low of $1.0178 marked on Wednesday, on worries about fallout from the European crisis on the global economy.

Traders said the Aussie's fall also reflected investors' inclination to take profits from whatever assets they could. Against this backdrop, gold fell nearly 1 percent.

The New Zealand dollar slipped 0.5 percent to $0.8153 after a dovish-sounding statement by the Reserve Bank of New Zealand . As expected, the central bank left rates on hold at 2.5 percent.

The yen was supported not far from its record high against the dollar by virtue of Japan having one of the most liquid debt markets in the world, attracting some safe-haven bids.

The dollar stood at 76.67 yen, near a record low of 75.941 yen hit last month, though concerns that Tokyo may intervene to curb the yen's strength supported the dollar.

The Swiss franc was little changed after the Swiss National Bank reiterated its determination to defend the 1.20 target floor level against the euro in its quarterly monetary policy announcement, adding it sees no imminent inflation risk.

The franc stood at 1.2060 francs per euro , continuing to hold above the 1.20 floor set by the SNB last week in response to the franc's recent climb to record highs against the euro and the dollar.

Copyright Reuters, 2011