Reuters: US Dollar Report: FOREX-Euro rises before Irish vote but stays vulnerable

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FOREX-Euro rises before Irish vote but stays vulnerable May 31st 2012, 08:41 Thu May 31, 2012 4:41am EDT * Worries growing that Spain needs external help * Euro falls to near two-year low vs dollar, then recovers * 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 helped the euro recover from 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. The euro fell as low as $1.2358, a level last seen in mid-2010, before recovering to trade up 0.3 percent at $1.2410. Any gains were expected to be short-lived, however. The common currency was poised for its biggest monthly fall in at least eight, with some analysts expecting it to drop towards $1.20 in coming weeks as the euro zone's 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. "Things are starting to look ugly. It seems like the market is making Spain its next target after Greece," said Teppei Ino, currency analyst at Bank of Tokyo-Mitsubishi UFJ in Tokyo. The European Commission on Wednesday offered Spain more time to reduce its budget and direct aid to recapitalise distressed banks, but the news had limited impact on financial markets. Member states must decide whether to adopt these proposals and EU paymaster Germany has opposed any collective European banking resolution and guarantee system. Speaking on Thursday, European Central Bank President Mario Draghi said the ECB could not "fill the vacuum" left by a lack of action on the part of national governments on fiscal growth. Against the yen, the euro was at 97.83 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 as Greek polls showed parties for and against a bailout were neck-and-neck ahead of the country's second election on June 17. With investors trying to escape the euro zone into liquid assets, the dollar's index against a basket of currencies hit a 20-month high of 83.11. It was last at 82.883 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 as low as 78.71 yen, the lowest in 3-1/2 months, as investors favoured the yen. A fall in U.S. bond yields also helped to push down the dollar against the yen, as the currency pair is known to have a strong correlation with the yield gap between the two countries. 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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