LONDON: The euro edged higher against the dollar on Thursday ahead of a sale of Spanish bonds that will test investor confidence in troubled peripheral debt markets as worries persist about the sustainability of Spain's public finances.
Talk that the auction of new two-year and 10-year bonds could see solid demand helped prop up the euro, keeping it comfortably above strong chart support at $1.30, analysts said.
Spanish 10-year bond yields jumped above 6 percent earlier this week and there are concerns that Spain will pay dearly to raise longer-term debt. Yields on Spanish paper have fallen in the secondary market, however, following a decent T-bill sale earlier this week.
"Ahead of the Spanish auction there are hopes that it might not be a disaster, which is the main driver and the euro is pretty stable above $1.30," said Arne Lohmann Rasmussen, head of currency research at Danske Bank in Copenhagen.
The euro edged up 0.1 percent to $1.3134, recovering from a drop to $1.3058 on Wednesday. Traders said it looked well supported around $1.3000, but could struggle above $1.3200 with the April 12 high of $1.3213 likely to prove stiff resistance.
Any escalation of concerns about Spain's high level of debt at a time when the economy is faltering would put the euro back under pressure, taking it back below $1.30 and towards the 2012 low of $1.2624.
The euro was under pressure against riskier currencies, particularly sterling and the Swedish crown which were buoyed after less dovish central bank statements from the Bank of England and Riksbank on Wednesday.
Many traders and analysts think the euro will head lower against the dollar in the medium term given the risks that budget and debt problems in Spain will worsen and uncertainty over the outcome of the French presidential election.
Traders cited talk of hedge funds betting the euro will fall to $1.25 soon after the French poll concludes early next month.
But Rasmussen said Dankse forecast the euro to be at $1.32 in three months and in six months, mainly reflecting the fact that the market was extremely short of euros against the dollar, which he said could make it difficult for it to break lower in the short term.
YEN FALLS
The safe-haven Japanese yen fell, under pressure as equities gained before the Spanish debt auction and after Bank of Japan Governor Masaaki Shirakawa stressed the central bank's commitment to powerful monetary easing.
The dollar rose 0.2 percent to 81.46 yen, near its highest level in more than a week, with traders citing flows related to the launch of a large investment trust by a Japan investment bank.
The euro was up 0.4 percent at 107.05 yen.
"The dollar was pushed towards 80 yen this week, but its solid rebound well above 81 yen underscores its underlying strength making it hard for speculators to bet against it," said Bank of Tokyo-Mitsubishi UFJ analyst Teppei Ino in Tokyo.
Traders cited stop loss buy orders above 81.60 and mild resistance at the 21-day moving average at 81.87.
The higher-yielding Australian dollar rose 0.15 percent against the US dollar to US$1.0374.
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