Euro rises on German vote but contagion risk lingers

NEW YORK: The euro rose against the dollar on Thursday as Germany approved an expansion of the euro zone rescue fund, but the single currency pared some gains as investors squared positions before month-end.

German Chancellor Angela Merkel's coalition party voted to enhance the European Financial Stability Facility's powers, joining 10 other countries that have approved an expansion that would increase the euro zone's firepower to help debt-ridden countries.

Hopes that policymakers are finally acting to prevent the debt crisis from worsening have supported the euro in the past few sessions, lifting it off an 8-month low of $1.3360 set on Monday.

But as the New York close drew near, the euro pared its gains.

"The impetus from the German vote has waned, leaving the euro no choice but to come off its highs," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey.

The euro was last up 0.1 percent to $1.35595, having peaked at $1.36799 on trading platform EBS. It also gained 0.3 percent to 104.030 yen .

Optimism that the next tranche of Greece's bailout funds will be approved also gave support to the euro.

Data showing US initial jobless benefits at a five-month low in the latest week and the economy slightly stronger in the second quarter than previously thought added to demand for riskier currencies such as the euro and the Australian dollar.

CONTAGION RISK STILL ALIVE

The euro was on track to post its worst month in 10 months and its worst quarter since mid-2010 against the dollar.

Analysts said investors were wary of pushing the euro higher until euro zone officials have a credible plan to prevent Greece's debt problems from spreading to Italy and Spain.

Italy paid the highest yield on a 10-year bond since the introduction of the euro at an auction on Thursday, the first long-term sale since Standard and Poor's cut the country's sovereign ratings.

"The threat of contagion is still very much alive," said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston.

Shankar said his firm's bond flow indicators show peripheral euro zone debt exposure remains firmly out of favor, with continued net selling, especially of Italian and Greek instruments.

On the downside, traders reported demand from model-based accounts around $1.3580 with stop-loss orders below. Support is seen around $1.3485, a 61.8 percent retracement of its advance to $1.3360 from $1.36909 this week.

Resistance lies around $1.3715, the 61.8 percent retracement of its decline to $1.3360 from $1.3937 in the second half of September. Talk of Asian sovereign supply in the $1.3700 area could cap any significant gains.

The dollar rose 0.2 percent to 76.73 yen, not far from the record low of 75.941 hit in August on electronic trading platform EBS. It had earlier risen to a two-week high of 77.030 yen on EBS.

Traders said month-end flows and portfolio reallocation dominated some of the volumes, while a Jewish holiday left some trading desks thinly staffed.

The New Zealand dollar fell to the session low against the US dollar on Thursday after ratings agency Fitch cut New Zealand's credit rating by one notch to AA.

Fitch said it is unlikely the country will be able to sustainably reduce its current account deficit in the next few years. .

The New Zealand dollar was last down 1.1 percent at US$0.7655 after going as low as US$0.7650, according to Reuters data.

Copyright Reuters, 2011