Reuters: US Dollar Report: FOREX-Euro stages relief rally on EU agreement

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FOREX-Euro stages relief rally on EU agreement Jun 29th 2012, 08:13 Fri Jun 29, 2012 4:13am EDT * Euro/dollar poised to biggest daily rise in 8 months * ESM's lack of preferred credit status to Spain cheered * Agreement upends expectations for no progress at EU summit By Anirban Nag LONDON, June 29 (Reuters) - The euro rose sharply against the dollar on Friday after European leaders agreed on decisive action to lower the borrowing costs of Italy and Spain and create a single supervisory body for euro area banks. The summit of the 17-nation currency zone surprised markets by producing a deal to let the euro zone's rescue fund be used to stabilise bond markets without forcing countries that comply with EU budget rules to adopt tough austerity measures. The rescue fund would be used in a flexible manner with the European Central Bank to conduct market operations. The common currency soared more than 1.2 percent on a flurry of stop-loss buying to as high as $1.2628, pulling away from a low of 1.2407 marked on Thursday. It later settled around $1.2600, with resistance at the June highs of $1.2748. Analysts said that expectations from the summit had been so low that the positive outcome wrongfooted investors who had gone bearish on the euro, forcing many to cut short positions. Still, there was a degree of scepticism with many awaiting for more clarity about the measures agreed. Some analysts pointed to considerable execution risks in the move to empower the ECB with a supervisory role that could prove to be contentious. Besides, the market would soon start to question whether the euro zone's rescue fund has enough resources to recapitalise banks and buy peripheral bonds given the huge debt liabilities of both Italy and Spain. While these issues may return to weigh on the euro in the coming days, traders said for now the common currency was being supported by falling Spanish and Italian bond yields. European stocks also rose, all of which helped shore up risk appetite and led to a selloff in the safe-haven U.S. dollar and the yen. "The proposed changes to the EFSF/ESM have come as a surprise and these are bringing down euro zone peripheral bond spreads and pushing the dollar and the yen lower," said John Hardy, currency strategist at Saxo Bank. "But structural issues remain; the question whether greater fiscal integration can be achieved is still there. So while in the near term, a short squeeze would push the euro higher, I see no reason to buy it with a longer term view. I do not think it can sustain gains beyond the June highs." Earlier, in a significant climbdown for European paymaster Germany, EU leaders agreed the bloc's future permanent bailout fund, European Stability Mechanism (ESM), would be able to lend directly to recapitalise banks without increasing a country's budget deficit, and without preferential seniority status. The preferred creditor status of the ESM worried markets, piling pressure on Spanish bonds, because investors were concerned that if Spain were to default, the ESM would get paid back first and there would not be enough money left to repay private bondholders. "Because market expectations on the summit were so depressed, it was a bit like there was a drop of rain in the desert," Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank. SHORT TERM BOUNCE Chartists pointed out, however, that the euro failed to decisively move above the immediate resistance at $1.2617 - the 61.8 percent retracement of its decline over the past two weeks. A clear break above the resistance and then $1.2630 would pave the way for a return to last week's high at $1.2748. Against the yen, the euro jumped 1.4 percent to 100.22 yen, pulling away from a low of 98.37 plumbed on Thursday. The dollar also rose against the yen. The greenback went up 0.2 percent to 79.63, having earlier dropped to a 1-1/2 week low against the yen of 79.31. The growth-linked Australian dollar hit a one-week high on the euro zone news and as stock markets surged. The Aussie jumped 1.4 percent to $1.0177. With risk currencies and the yen on the offensive, the dollar index - the gauge of the greenback's performance against a basket of major currencies - dropped 1 percent to a one-week low of 81.816, before steadying at 82.00. Link this Share this Digg this Email Reprints

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