LONDON: The euro recovered from steep falls against the dollar on Thursday as market participants took profit on short positions, but renewed falls were expected as investors fretted the euro zone crisis was spreading to Germany.
The single currency slid to a seven-week low of $1.3320 on Wednesday as a weak German government bond auction sparked fears that even the safe-haven status of Europe's biggest economy could be under threat.
Short-covering helped the euro recover to trade up 0.3 percent at $1.3374 and analysts said it could edge higher short-term. It was also helped by a better-than-expected German business climate survey on Thursday, though traders said the data was unlikely to temper fears about the possibility the euro zone economy could face recession.
However, the extent of bearish sentiment towards the single currency left it on track to retest the October low of $1.3144, having retraced more than 78.6 percent of the rally from that level to the late October high of $1.4247.
Traders reported offers between $1.3415 and $1.3450 that were likely to cap any rise.
"Short-covering may continue for a bit and we look for a correction perhaps to $1.3430 but thereafter it is heading south. It is a case of two steps down and one step up for the euro," said Carl Hammer, currency strategist at Nordea in Stockholm.
"The Bund auction got people wondering about how big German debt is and it coincided with (European Commission President Jose Manuel) Barroso talking about euro bonds".
The market looked to a meeting of leaders of Germany, France and Italy on Thursday, although few players expected progress in steps to deal with the crisis.
Germany's bond sale on Wednesday was its least successful since the launch of the single currency. Although unattractively low yields played a part, investors worried about the rising cost of bailouts as more euro zone countries come under attack.
German Bund futures extended Wednesday's losses, hitting their lowest level in nearly a month.
"If Germany has to pay higher costs for its borrowing, it's obvious it cannot help the entire euro zone. If German bond yields keep rising, that could even be a trigger for the break-up of the euro," said Makoto Noji, a senior strategist at SMBC Nikko Securities in Tokyo.
EURO/YEN
The euro was at 103.21 yen, having earlier hit a seven-week low of 102.92 yen, opening the way for a test of the decade low of 100.77 yen hit in early October.
Investors have also been unnerved by a rise in Belgian bond yields as the country -- without a formal government since elections last June -- struggles to agree on a deficit-slashing budget for next year.
The euro's recovery helped other riskier currencies, with the Australian dollar up 0.6 percent at $0.9742, having slid to a seven-week low of $0.9664 on Wednesday on concerns about a deteriorating global growth outlook.
The dollar slipped 0.1 percent against the yen to 77.18 yen , with its rise to a near two-week high on Wednesday, when Tokyo was on holiday, luring Japanese exporters to sell.
Comments
Comments are closed.