Reuters: US Dollar Report: FOREX-Euro held back by Spain's woes, near record low vs Aussie

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FOREX-Euro held back by Spain's woes, near record low vs Aussie Jul 20th 2012, 06:15 Fri Jul 20, 2012 2:15am EDT * Recent falls in short-term rates seen negative for euro * Spanish 10-year bond yields back above 7 pct threshold * Euro/Aussie may head lower -traders By Masayuki Kitano SINGAPORE, July 20 (Reuters) - The euro eased against the dollar and hovered near a record low versus the Australian dollar on Friday, and was seen on shaky ground due to worries about Spain's fiscal woes and as investors hunt for higher yields. Weak demand at a bond auction pushed Spain's 10-year bond yield above 7 percent on Thursday for the first time in more than a week, intensifying doubts over whether Madrid can avoid a full-blown bailout. The euro fell 0.2 percent to $1.2253, staying above a two-year low of $1.2162 hit on trading platform EBS last week. The single currency held steady against the Australian dollar at A$1.1779, stuck near Thursday's record low around A$1.1735. Besides investor jitters over the euro zone's sovereign debt crisis, the euro has taken a hit this month after the European Central Bank lowered the deposit rate, which acts as the floor for euro zone money market rates, to zero. Also, the fact that two-year bond yields have dipped into negative territory recently in Germany and the Netherlands, two euro zone countries in relatively good fiscal health, has fanned talk about the possibility of a fresh investor shift out of euro zone assets. Negative yields on such euro zone assets could entice investors who are bearish on the euro's outlook to shift money elsewhere, market players say. "There is a global trend in which the euro seems like the weakest currency," said Hiroshi Maeba, head of FX trading Japan for UBS in Tokyo, adding that falls in shorter-term euro zone interest rates have further eroded the incentive for holding euros. "I think we could see this trend in euro/Aussie continue over the longer term," Maeba said, referring to the euro's weakness against the Australian dollar. The euro has been weighed down against the yen recently due to selling by institutional investors, Maeba added. The euro declined 0.2 percent against the yen to 96.30 yen . A drop below 95.59 yen would take the euro to its lowest level against the yen since November 2000. EURO/AUSSIE The euro has already dropped roughly 10 percent versus the Australian dollar compared with a peak of A$1.3028 hit in May. The euro may still fall even further, said Jesper Bargmann, head of Asia G11 spot FX for RBS in Singapore. "I think there is a bit of a theme going on, and the biggest single mover is central bank reserve diversification out of the euro, and into especially Aussie," Bargmann said. "I do think we can carry on lower...As a macro trade it's got everything going for it," Bargmann said. The potential for another round of quantitative easing from the U.S. Federal Reserve may help support commodities and the Australian dollar, while the euro should continue to stay weak due to concerns over the euro zone's debt crisis, he added. The ECB deposit rate cut and subsequent drop in money-market rates has also stirred talk of euro-funded carry trades, i n which investors effectively borrow low-yielding currencies to invest in higher-yielding currencies and assets. "The euro is being viewed as a funding currency and there are increasingly active moves on the back of that," said a trader for a major Japanese bank in Bangkok. Still, economic conditions do not seem to favour the carry trade as much as they did around 2005 to 2007, when the yen was the funding currency of choice and the global economy enjoyed a period of stable growth, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore. "Economic conditions are weak compared to the heyday of the carry trade. What's clearly different compared to then is that the global economy now seems to be headed downwards," he said. The dollar rose 0.1 percent versus the yen to 78.60 yen , but was still near Thursday's six-week low of 78.42 yen. Link this Share this Digg this Email Reprints

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