The euro held earlier gains on Wednesday after strong demand at a Portuguese government debt auction quelled some immediate concerns about the country's funding problems. The euro barely moved after Lisbon sold 1.249 billion euros in debt, including 10-year bonds which were sold at a lower average cost tèat at a previous sale, while three-year bonds went at a significantly higher yield.
Analysts said the euro would remain under selling pressure, extending its sell-off to a four-month low earlier this week, as the sale did little to change the view that Portugal was likely to seek a bailout for its mounting debt costs. "All the Portuguese auction does is buy a little bit of time for Portuguese authorities," said Jane Foley, currency strategist at Rabobank. By 1128 GMT, the euro was unchanged on the day at $1.2975, holding above a four-month low of $1.2860 plumbed at the start of the week.
Also bolstering the euro were comments from eurozone sources that finance ministers are likely to consider next week raising the effective lending capacity of the currency bloc's rescue fund as part of efforts to calm jittery markets. This follows Japan's promise to support an upcoming bond sale by the fund, the European Financial Stability Facility.
Despite support for the euro on Wednesday, technical analysts say it faces stiff resistance around $1.3070, the 200-day moving average. "The near-term risks will remain to the downside until there is a clear breach of the 200-day moving average," BTM UFJ analysts said in a note.
Analysts said the Portuguese auction results would do little to change the view that Lisbon will continue to struggle to fund itself and may have to turn to the European Union an International Monetary Fund for a bailout, which would ultimately keep the euro weak.
Many argue that sentiment towards the single currency will remain subdued due to persistent concerns that the debt financing problems affecting Portugal and Spain may spread to other eurozone countries, with some seeing Belgium in the firing line due to political instability.
Rabobank's Foley added that a Spanish auction on Thursday would offer a better indication of whether the debt crisis, which has already forced Ireland and Greece to seek assistance from the EU and the IMF, can be contained. Against the yen, the euro was flat at 108.01 yen, well off four-month lows around 106.81 set on Monday.