Reuters: US Dollar Report: FOREX-Euro gains on short-covering as Australia GDP boosts sentiment

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FOREX-Euro gains on short-covering as Australia GDP boosts sentiment Jun 6th 2012, 05:54 Wed Jun 6, 2012 1:54am EDT * ECB policy meeting in focus * Aussie jumps as Q1 GDP comes in above f'cast * AUD/JPY rally weighs on broadly on JPY By Antoni Slodkowski TOKYO, June 6 (Reuters) - The euro gained on short-covering on Wednesday after riskier assets rose on strong growth data from Australia, recouping some of the losses sustained on Spain's warning it was losing access to credit markets. G7 finance ministers took no immediate steps to soothe fears over Europe's debt woes on Tuesday, while European Union leaders appeared to be working towards a plan for deeper political integration to underpin the future of the euro. Against this backdrop, traders stayed cautious ahead of a European Central Bank (ECB) policy meeting on Wednesday, with some positioning for an interest rate cut, although most expected the bank to hold fire and keep rates at 1.0 percent. "With intense political negotiations going on, the ECB may find it difficult to move decisively to boost the European bond market. I also don't think it will cut rates," said Sumino Kamei, senior currency analyst at the Bank of Tokyo-Mitsubishi UFJ. Economists view the decision whether to cut rates as one of closest calls in years, with awful data in recent weeks leaving the euro zone facing a far harsher recession than imagined. "If the bank takes no action, it is likely to disappoint markets and we may see another bout of euro selling," Kamei said. The single currency rose 0.4 percent to $1.2503, pulling away from a two-year low of $1.2288 plumbed last Friday. Traders said any gains in the currency were likely to run into offers looming at $1.2520-40. UNRAVELLING Markets are on tenterhooks as Spain scrambles to avoid becoming the fourth euro zone nation to ask for a bailout, while Greece's June 17 election could yet drive it out of the bloc, potentially unravelling the whole project. "Bleak as the euro area outlook is, it could easily get worse after the Greek election on 17 June and there may be an argument for the ECB keeping its powder dry," said James Nixon, chief European economist at Societe Generale. "More substantively, we believe the ECB is increasingly concerned by the moral hazard actions. Each time it intervenes it merely eases the pressure on Europe's political leaders." Sentiment was hardly helped by Moody's Investors Service cutting the credit ratings of several German banks on Wednesday, citing increased risk of further shocks emanating from the euro zone debt crisis and their limited loss-absorption capacity. On the daily Ichimoku chart, the tenkan line at $1.2457 is poised to provide immediate support. The euro has emerged and mostly held above it for the last two days, its first such foray in about a month. Strong resistance looms at $1.2545, the 76.4 percent Fibonacci retracement of its decline last week after the currency failed to breach that level on Tuesday. Against the yen, the single currency rose 0.6 percent to 98.65 yen, moving off Friday's 11-year low of 95.59 yen. Other currencies benefiting from a lightening of very bearish positions included the Australian dollar, which suffered a drop of over 6 percent last month. It rallied more than one percent to as high as $0.9862 after data showed Australia's growth beat expectations, lessening the need for deep interest rate cuts. This helped it stay well off Friday's 8-month trough of $0.9581. Part of the Aussie's resilience reflected the Reserve Bank of Australia's (RBA) decision on Tuesday to trim interest rates by 25 basis points, instead of a more aggressive half-a-percentage-point move. The Aussie muscled in on the yen rising 1.3 percent to 77.65 yen, driving a broad decline in the yen. This saw the yen fall 0.2 percent versus the dollar to 78.89 . The yen extended hefty losses made after Japan warned it was ready to step in to curb the its strength. Still, some market players are buying short-term dollar/yen calls to bet on, or hedge against intervention, keeping the one-week risk reversal spread at its highest in favour of dollar calls in six months. Link this Share this Digg this Email Reprints

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