Euro rises in London

The euro rose against the dollar on Thursday, boosted by strong demand at an auction of Spanish bonds, but could face some selling if the European Central Bank hints at more interest rate cuts to prop up the bloc's economy as the debt crisis deepens. The single currency showed little reaction to the ECB keeping rates on hold at 1 percent. Market players said the unchanged rate had been widely anticipated and was already priced in.
Analysts said the single currency could come under a bit of pressure if ECB President Mario Draghi uses his news conference at 1330 GMT to hint at more policy easing in coming months, although the downside is seen limited. Investors will also scrutinise the press conference for signals the central bank may buy more bonds of weak euro zone countries including Italy and Spain to calm a surge in their borrowing costs, or cut rates in the coming months.
"There is a fairly widespread expectation they will cut rates next month so the press conference should be relatively downbeat and signal the need for additional accommodation," said Adam Cole, head of FX strategy at RBC Capital Markets. Yields on benchmark 10-year yields on Spanish and Italian debt fell after the auctions, extending this week's slide and retreating from near levels at which other euro zone countries requested debt bailouts.
The single currency was 0.4 percent higher on the day at $1.2754, having touched a session high around $1.2778. "We've seen a nice lowering trend in the three days in Spanish and Italian yields, and the market is pricing in a more positive tone to bond markets at the periphery," said Steven Saywell, currency strategist at BNP Paribas.
Still, euro gains were limited and the currency still hovered within sight of a 16-month low of $1.2661 hit on Wednesday. Many in the market consider its slight rise as merely a correction from the heavy sell-off of past weeks. On Thursday the head of sovereign ratings for Fitch said Italy faces a "material risk" of being downgraded by the end of the month although the government should be able to raise the funds it needs on debt markets.
Despite the solid demand at the Spanish auction traders said the overall bias remained for more downside for the euro. Against the yen, the single currency rose as high as 98.23 yen, but it hovered near an 11-year low hit at the start of the week, while it also hung near a 16-month low versus sterling and a record trough against the Australian dollar.
Euro/dollar gains nudged the dollar 0.3 percent lower versus a currency basket to 81.061, near the 81.49 hit on Wednesday, its highest in 16 months. Growing pessimism about the ability of European officials to agree a permanent solution to debt problems plaguing the region has prompted a heavy selloff in the euro in past months. It is also one of the worst performing currencies of 2012, having already fallen more than 1.5 percent versus the dollar in eight trading days. The euro slipped to a 3-1/2 month low versus the Swiss franc on Thursday as it pared the broad gains made earlier in the day.