Reuters: US Dollar Report: FOREX-Euro held down by receding EU expectations

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FOREX-Euro held down by receding EU expectations Jun 26th 2012, 08:26 Tue Jun 26, 2012 4:26am EDT * Euro undermined by receding hopes on EU summit * Support for euro/dlr seen around $1.2443 * Yen firm, but political uncertainty in Japan to weigh By Anirban Nag LONDON, June 26 (Reuters) - The euro was pinned down near a two-week low against the dollar on Tuesday, as rising peripheral euro zone debt yields added to concerns that an upcoming European summit was unlikely to produce anything substantial to solve the region's crisis. Any lingering expectations of a quick move towards a banking union or issuance of common euro zone bonds were quashed by Germany, keeping alive the risk of disappointment from the summit pretty high. That is likely to see the euro struggle in the near term, analysts said. The euro was flat on the day at $1.2510, running into steady selling by macro funds at higher levels with offers cited from sovereign investors above $1.2530, traders said. It fell to a two-week low of $1.24713 on Monday. Support is seen near the June 12 low around $1.2443, below which sizable bids are cited. A break below June 12 could open the door to a test of the two-year low of $1.2288 hit on June 1. "There are vague proposals on the table for discussion towards a closer fiscal union but frankly it is tough to see anything concrete coming out of the summit," said Chris Walker, currency strategist at UBS. "Given the markets are already bearish on the euro, there is a risk of a short squeeze, but that would be good opportunity to sell the euro." UBS said scepticism about the euro was reflected in the bank's latest flow monitor, which showed their clients continued to add to short euro positions last week, while overseas investors offloaded a net $2 billion worth of euro-denominated equities - the most since July 2008. Investors were also selling peripheral euro zone bonds. Spanish and Italian bond yields crept higher on doubts that euro zone policymakers will be able to respond with decisive measures to contain the debt contagion. SHOWDOWN IN TOKYO The risk of disappointment from another euro zone summit and risk aversion supported the Japanese yen and helped it pull away from a two-month low against the dollar. But the currency could struggle as political uncertainty gripped Japan. Japan's lower house approved a plan to double the sales tax to help curb the nation's snowballing debt, although the vote split the ruling Democratic Party. The euro stayed below 100 yen to fetch 99.513 yen , having shed more than 1 percent on Monday. The dollar was down 0.1 percent at 79.50 yen, off a two-month high of 80.63 yen struck on Monday. "The threat of heightened political uncertainty may weigh upon the yen in the near-term although it is more likely to be offset by ongoing negative developments in Europe which are still fuelling safe haven demand for the yen," Lee Hardman, currency economist at Bank of Tokyo Mitsubishi wrote in a note. A U.S. bank trader in Asia said strong resistance in the dollar/yen currency pair prompted some hedge funds that had built yen short positions on speculation about more easing by the Bank of Japan to unwind their bets. Some market players think the yen may come under pressure if a large number of ruling party lawmakers revolt against Prime Minister Yoshihiko Noda's tax hike plan, which could force him to call an early election. With a number of ruling party lawmakers threatening to vote against the bills and to leave his Democratic Party of Japan, Noda is facing risk of losing a parliamentary majority, which could lead to an early election. Link this Share this Digg this Email Reprints

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