Reuters: US Dollar Report: FOREX-Euro lifts off lows but Spain threat lingers

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FOREX-Euro lifts off lows but Spain threat lingers May 31st 2012, 11:45 Thu May 31, 2012 7:45am EDT * Euro off two-year lows vs dollar * Irish "yes" vote could provide very brief reprieve * But trend remains for further falls in the euro By Jessica Mortimer LONDON, May 31 (Reuters) - Expectations of an Irish vote in favour of Europe's fiscal pact lifted the euro off a near two-year low against the dollar on Thursday, though any gains were seen limited as concerns grow that Spain may need to seek outside aid. Opinion polls pointed to a "yes" vote in Ireland's referendum, which analysts said could prompt investors to cut some of their hefty bearish bets on the euro. in Greece, a new poll showing a pro-bailout conservative party ahead of the anti-bailout far left in the run-up to a parliamentary vote also helped the euro. The euro fell as low as $1.2358, a level last seen in mid-2010, before recovering to trade up 0.2 percent at $1.2400. Gains were expected to be short-lived, with sell offers cited above $1.2430 and some speculators selling into the bounce. The common currency was poised for its biggest monthly fall since last September, with some analysts expecting it to drop towards $1.20 in coming weeks as the debt crisis deepens. "We could see a very brief pause in the downtrend in the euro because of the Irish referendum, but beyond that the news is fairly negative," said Ian Stannard, head of European currency strategy at Morgan Stanley. "There is very little on the horizon to provide sustained support and the trend is clearly downwards." Morgan Stanley forecast the euro would fall to $1.15 early in 2013, though this assumes Greece stays in the euro, he said. Spanish government bond yields held near euro-era highs and yields on safe-haven German bonds stayed close to record lows as worries about Spain's banking sector and chances that the country would have seek an international bailout mounted. With German two-year yields near zero, traders said most safe-haven flows have, so far, stayed within the single currency area. But if that were to change and those flows began to exit the euro zone, the euro's decline against the dollar and the yen could accelerate considerably. European Central Bank President Mario Draghi said the ECB could not "fill the vacuum" left by a lack of action on the part of governments on fiscal growth. The euro was flat at 97.76 yen, having dropped to its lowest in more than four months at 97.352 yen. This brought it close to an 11-year low of 97.04 yen hit in January. FLIGHT TO SAFETY Market players remained nervous about political risks in the euro zone, especially Greek elections on June 17. "The way you trade these political risk factors is to sell the euro," said Stuart Frost, head of Absolute Returns and Currency at fund manager RWC Partners. "The Greek opinion polls are very volatile, and only the election results will matter. In any case, the situation in Spain is pretty grim, so we expect the euro to grind lower to $1.20 and then towards $1.18." With investors stepping up their purchases of safe-haven assets, the dollar index hit a 20-month high of 83.11. It was last at 82.857 and looked set to close above its 100-month average, at 81.824, for the first time in almost 10 years. A break of the 100-month average has been a good indicator of a long-term trend change, having produced four successful signals in the past 30 years. The dollar fell to 78.71 yen, its lowest in 3-1/2 months, before recovering to trade at 78.81. A fall in U.S. bond yields also helped to push down the dollar against the yen, as the currency pair is strongly correlated with the yield gap between the two countries. Traders will watch the U.S. ADP employment report, along with the first-quarter gross domestic product reading and initial jobless claims. Weak data could feed speculation about further quantitative easing, leaving dollar/yen vulnerable. The dollar has crucial support for now from its 200-day moving average at 78.63 yen. Link this Share this Digg this Email Reprints

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