FOREX-Euro bounces back ahead of EU summit, ECB hopes help
* Euro above 3-week low as market braces for EU summit
* Euro helped by growing speculation of ECB action
* U.S. data helps risk assets, Aussie at 1-week high vs USD
* Month-end Japan exporters' selling sends dollar/yen lower
By Hideyuki Sano
TOKYO, June 28 (Reuters) - The euro bounced off a three-week low against the U.S. dollar on Thursday on short-covering ahead of a European Union summit starting later in the day and also helped by expectations of more monetary support from the European Central Bank.
While many market players expected European leaders to struggle to agree on bold steps to solve the region's debt crisis at their summit, some market players were playing it safe by squaring their positions just in case there would be a surprise breakthrough.
The single currency rose 0.35 percent in Asia to $1.2511 , versus $1.2466 late in New York, recovering further from the three-week low of $1.24413 hit earlier in the week.
On the whole market players' expectations for the two-day European Union summit are already low, as EU leaders look more openly divided than at any time since the debt crisis erupted in Greece in 2010 and spread over the euro zone.
German Chancellor Angela Merkel on Wednesday brushed aside increasingly shrill calls from Spain and Italy for emergency action to lower their soaring borrowing costs and poured cold water on the idea of joint euro zone debt.
"The summit will probably just show that the debt crisis needs a lot of time to be resolved. I don't think it's time to buy the euro," said Katsunori Kitakura, associate general manager of the market-making unit at Sumitomo Mitsui Trust Bank.
Still, the euro has some support around $1.2440.
In one sign that market players have curbed their extreme pessimism on the euro, the costs of buying euro/dollar put options have dropped to the cheapest level in about two months.
The euro/dollar's risk reversal spread eased to around 1.3 percent in favour of euro/dollar puts, compared with a high of around 2.6 percent just over a month ago.
Analysts from Barclays also noted that riskier assets tended to rise in the week following 18 EU summits since 2010, with the euro eking out average gains of around 0.2 percent and the Aussie 0.6 percent, despite widespread cynicism in the market on the EU's ability to tackle the crisis.
ECB TO THE RESCUE?
"The market is already expecting disappointment from the summit. But I do think the euro will be supported by expectations that the European Central Bank will take some measures next week," said a currency trader at a Japanese bank.
With concrete steps for further integration of the currency bloc seen unlikely while Spanish and Italian debt yields remain at unsustainably high levels, market players are increasingly betting the ECB will either cut rates or announce massive long-term fund injections after its policy meeting next week.
The bank's Executive Board member Peter Praet said on Wednesday there is nothing to stop the bank cutting rates and 48 out of 71 economists polled by Reuters expected a rate cut.
Helping to fan such speculation, German inflation eased to an 18-month low, government data showed on Wednesday, which market players think could help nudge traditionally hawkish ECB policymakers towards easing.
Italy's borrowing costs are likely to rise above 6 percent at an auction of up to 5.5 billion euro bonds planned later in the day, just hours before the start of the summit.
On the other hand, U.S. economic data offered a rare positive surprise on Wednesday, with durable goods orders and pending home sales both beating market expectations, helping to boost risk sentiment in broad financial markets.
That helped to lift the Australian dollar by around 0.3 percent on Thursday to a one-week high of $1.0121, though strong resistance is seen around $1.0130, a level representing the 61.8 percent retracement of its recent decline.
The Aussie hit a four-month high against the euro, which fell as low as A$1.2331.
The U.S. dollar fell 0.4 percent against the yen to around 79.40 yen largely due to month-end selling by Japanese exporters, but it stayed within its trading range of the past few days.
"I don't think a clear trend will emerge in the dollar/yen in the near future," said Koichi Takamatsu, forex manager at Nomura, adding that the pair is hemmed in by Japanese exporters' offers above 80 yen on the upside and by wariness about Japan's intervention around 78 yen.
Traders also said it might not be wise to read too much on latest price actions as month-end and quarter-end flows probably played a big role in each currency pair in otherwise thin market ahead of the EU summit. (Additional reporting by Ian Chua in Sydney, Antoni Slodkowski in Tokyo and Masayuki Kitano in Singapore; Editing by Chris Gallagher & Kim Coghill)
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