Euro stays near 6-week high vs dollar before summit

LONDON: The euro stayed close to a six-week high hit against the dollar on Tuesday, supported by expectations European leaders would deliver a convincing plan to contain the region's debt crisis at a summit on Wednesday.

The euro was down 0.1 percent at $1.3914, not far from Monday's six-week high of $1.3957. However, analysts said investors would need to see a positive summit outcome for the euro to break above $1.40, while its current lofty level left it vulnerable to a sell-off in the event of any disappointment.

Uncertainty remained about whether the plan would prevent contagion to larger countries, while there were concerns about divisions among EU leaders over the extent of the losses private holders of Greek debt would have to accept.

"It will be difficult for the euro to break above $1.40 ahead of the meeting. People are happy to sit on their positions awaiting any outcome," said Niels Christensen, currency strategist at Nordea in Copenhagen.

"The indications are that there is a will to solve the problem, which is maybe not a huge leap but it's a step ahead not backwards."

However, he said there were still concerns that debt problems, in Greece but also in larger countries such as Spain and Italy, could be exacerbated if growth was very weak.

Surveys on Monday showed euro zone manufacturing contracting much more than expected in October, raising concerns that the crisis may already have pushed the region's economy into recession.

The euro faced resistance near $1.3988, its 200-week moving average, and around $1.4040, which is roughly a 50 percent retracement of the single currency's May to October decline.

European leaders neared a deal over the weekend on bank recapitalisation, and euro zone officials said France and Germany were close to agreement on how to leverage a euro zone rescue fund to stop bond market contagion.

But the difficulties in reaching a political consensus were highlighted as German lawmakers secured a full parliamentary vote on euro zone crisis measures negotiated by Chancellor Angela Merkel, a move which risked delaying Europe's response.

DOLLAR/YEN

The yen hovered just shy of a record high against the dollar, leaving investors nervous about possible intervention by the Japanese authorities to stem the currency's rise.

Japanese Finance Minister Jun Azumi again warned markets about pushing up the yen too far, saying he was ready to take firm steps if its appreciation became excessive.

The dollar was steady at 76.09 yen , near a record low of 75.78 yen hit late last week on the EBS trading platform.

The dollar index, which measures the dollar's value against a basket of currencies, stood at 76.141, near a six-week low of 75.985 hit this week.

One factor that has supported the yen this year is a narrowing of yield spreads between Japanese debt and their US and European counterparts, which has made overseas bond investment less attractive to Japanese investors.

"There has been a dearth of (capital) outflows from Japan," said Fukaya at Credit Suisse, adding that institutional investors such as Japanese life insurers seem unlikely to aggressively step up their overseas investment.

Japanese life insurers have recently sounded cautious about investing in foreign bonds, including Sumitomo Life and Asahi Mutual Life Insurance.

Callum Henderson, global head of FX research with Standard Chartered Bank in Singapore, said his bank's forecast was for the dollar to stand at around 76 yen at the end of the year, little changed from its current level.

Copyright Reuters, 2011