Reuters: US Dollar Report: FOREX-Euro stumbles as Spain's bank woes, weak US data haunt

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FOREX-Euro stumbles as Spain's bank woes, weak US data haunt Jul 19th 2012, 17:40 Thu Jul 19, 2012 1:40pm EDT * Euro hits record low vs Aussie dollar * German finance minister's comments weigh on euro * Weak U.S. data dims risk appetite NEW YORK, July 19 (Reuters) - The euro was little changed against the dollar on Thursday after hitting a record low against the Australian dollar and a 3-1/2-year trough versus sterling, as weak U.S. data and Germany's fresh warnings about Spain's banking troubles diminished risk appetite. A slew of soft U.S. economic data affirmed views that recovery in the world's largest economy has stalled, prompting investors to pare back positions in risky but higher-yielding assets. Riskier currencies such as the Australian and New Zealand dollars were still up on the day against the dollar and euro, but off their peaks. Comments from German Finance Minister Wolfgang Schaeuble ahead of a German parliamentary vote on aid for Spanish banks did not help the common currency. Schaeuble said Spain's financial troubles are far from over and its government should be ultimately responsible for European aid to its banks. He added that the mere perception of insolvency risk in Spain could cause contagion in the euro zone. But the euro did gain some upward momentum when German Chancellor Angela Merkel ultimately won the parliamentary vote on the euro zone rescue package for Spanish banks despite growing unease in her center-right coalition about the rising cost of Europe's debt crisis for German taxpayers. "Obviously the U.S. numbers that came out were not too good and we also had comments from Schaeuble that were not positive for the euro," said Tom Fitzpatrick, chief technical currency strategist at CitiFX in New York. "So the combination of the two prompted a bit of adjustment to the downside." The euro hit session lows at $1.2227 in the wake of Schaeuble's comments and was last at $1.2278, down 0.05 percent on the day. Analysts expect the euro to retest a two-year low hit last week because investors, discouraged by a lack of progress toward solving the euro zone debt crisis, continue to shun the currency in favor of safer havens. A rise in U.S. jobless claims, an unexpected fall in existing U.S. home sales, and a worse-than-forecast contraction in the mid-Atlantic region's factory activity served to support the dollar as a safe haven. But as Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington pointed out, the positive impact on the dollar could fade. The data "can be a source of medium-term weakness for the dollar as investors increase bets the Fed will act to shore up a listless recovery," Manimbo said. Another round of quantitative easing should hurt the greenback because the Fed effectively floods the financial system with dollars, reducing the currency's value. GERMAN STANCE ON AID Germany's Schaeuble hurt the euro with his comments on the Spanish government's liability on European aid to the country's banks. "The Germans are being strict that the liability stays with the sovereign and all that does is exacerbate the debt burden of the sovereign and the market doesn't like that," said Boris Schlossberg, managing director at BK Asset Management in New York. Spanish 10-year yields climbed back above 7 percent after Schaeuble's comments. Spain sold 3 billion euros in debt at a higher cost than previous auctions. The euro also fell 0.3 percent against the yen to 96.50 yen and hit a record low against the higher-yielding Australian dollar as well as hitting a 3-1/2-year low against the UK pound. The euro zone's common currency also hit a record low versus the New Zealand dollar. The higher-yielding Australian dollar rose broadly, hitting a 2-1/2-month high against the U.S. dollar of A$1.0445. Traders cited demand from Australian companies to buy the currency as well as talk of central banks looking to diversify their holdings into Australian assets. TD Securities in a note said falling volatility has spawned carry trades, in which investors borrow in lower-yielding currencies to buy assets with higher returns, at the expense of the euro and dollar. Since the start of the year, TD said, EUR/AUD shorts have produced total returns of more than 9 percent, EUR/NZD shorts nearly 10 percent, while EUR/CAD shorts have yielded returns of just under 7 percent. The U.S. dollar fell to a six-week low against the yen of 78.42 yen, with investors preferring the Japanese currency due to the chance of more U.S. monetary easing. It last traded at 78.59 yen. Link this Share this Digg this Email Reprints

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