Reuters: US Dollar Report: FOREX-Euro undermined by low expectations for EU summit

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FOREX-Euro undermined by low expectations for EU summit Jun 26th 2012, 11:28 Tue Jun 26, 2012 7:28am EDT * Euro undermined by receding hopes on EU summit * Hits 2-week low vs yen, near 4-week low vs sterling * Spain's short-term borrowing costs leap at auction * Yen firm, but political uncertainty in Japan may weigh By Jessica Mortimer LONDON, June 26 (Reuters) - The euro hit a two-week low against the yen and a near-four-week low against the British pound on Tuesday, hurt by rising peripheral euro zone bond yields and expectations a European summit would achieve little to help resolve the region's crisis. The prospect of a quick move towards a banking union or issuance of common euro zone bonds looked increasingly unlikely, with German Chancellor Angela Merkel describing moves to share debt liability as "counter productive". Low expectations for the summit, which takes place on Thursday and Friday, may make the euro less vulnerable to a sell-off, analysts said. But a rally following any unexpected positive outcome would merely provide an opportunity to sell. The euro zone's debt problems showed no signs of abating, with Spain formally requesting aid for its banking sector on Monday, while Cyprus has become the fifth euro zone country to request help. "There is increasing pessimism as to whether any degree of substantive action will be agreed at the summit. The most encouraging thing is that no one has any expectations, but that's as good as it can get," said Jeremy Stretch, head of currency strategy at CIBC. "If there is any positive reaction I suspect it will be a case that the devil is in the detail and any rallies will be sold into." He added he expected the euro to drop towards $1.23 over the coming weeks. Underscoring the funding difficulties facing Spain, the country's short-term borrowing costs nearly tripled at an auction on Tuesday, further encouraging investors to push the euro lower. The euro dipped 0.1 percent against the dollar to $1.2495, pinned close to a two-week low of $1.24713. Traders cited selling by macro funds at higher levels and reported offers from sovereign investors above $1.2530. Against the yen it lost around 0.5 percent to hit 98.916 yen on EBS trading platform, its weakest since mid-June, while against sterling it dropped to 79.875 pence, its lowest since the end of May. "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 a good opportunity to sell the euro." The euro has support against the dollar at the June 12 low around $1.2443, but a break below there could open the door to a test of the two-year low of $1.2288 hit on June 1. 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. 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 dollar was down 0.3 percent at 79.39 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. 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. Link this Share this Digg this Email Reprints

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