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FOREX-Euro rallies from 2-year low but gains seen as tenuous
(Updates prices, adds details,)
* Euro higher after hitting 2-year low vs dollar
* Draghi keeps door open for more interest rate cuts
* Euro vulnerable, little expected from finance ministers' meeting
* Fed official says bank prepared to bring down unemployment
NEW YORK, July 9 (Reuters) - The euro gained against the dollar o n Monday in a mostly technical rebound from a two-year low touched earlier in the session even as the single currency faces more headwinds from global growth concerns and the region's ongoing debt crisis.
Euro zone finance chiefs were meeting to flesh out plans to reinforce their common currency, but investors are cautious the talks in Brussels may do little more than highlight the limitations of last month's deal to help indebted states and banks.
Diminished summit hopes also weighed on Spanish and Italian bonds, with yields moving back up to unsustainable levels.
One bright spot came as European Central Bank President Mario Draghi kept the door open to further interest rate cuts, saying the bank would make any decision on further action based on economic data. But investors cautioned it would not be enough to sustain gains.
While lower rates typically reduce demand for a currency, with the euro zone struggling to maintain economic growth, any signs of action to stimulate the economy will be taken as positive by investors.
For now though, investors were narrowly focused on the euro having fallen too far, too fast. As it regained some temporary footing, other investors who had bet against the euro were forced to buy to reduce losses, giving it more strength.
"There's a significant amount of traders short euro and therefore it is not particularly unusual to see unexplained bursts of short-covering," said Kathy Lien, managing director of FX strategy at BK Asset Management.
Currency speculators decreased their bets in favor of the U.S. dollar in the latest week, according to data from the Commodity Futures Trading Commission released on Monday. .
The euro was last up 0.2 percent against the dollar at $1.2314 after climbing as high as $1.2324 and well off a low of $1.2255 hit in early trade.
The dollar was last down 0.1 percent at 79.58 yen, moving away from a two-week high hit on Thursday, according to Reuters data.
Pressure for action by European leaders is growing, but there are nagging concerns that decisions on issues such as banking supervision, how to use Europe's rescue money, aid to Spain and Cyprus, and whether to grant concessions to Greece may take months to finalize.
"The market's overall cautious mood and a rise in Spanish and Italian bond yields are weighing on the euro, although reports that Spain's budget targets may be relaxed is perhaps providing a partial offset," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.
"For the week ahead we expect some consolidation in FX markets, with an overall neutral directional view on the U.S. dollar and other currencies," he said.
Strategists said further rises in Spanish and Italian bond yields could push the euro down further, potentially bringing the 2010 low into view.
European ministers were set to grant Spain an extra year to reach its deficit targets in exchange for further budget savings but remained far from pinning down details of bank rescues and emergency bond-buying that are of greater concern to markets.
EURO SEEN MOVING LOWER
The euro came under pressure last week as doubts quickly surfaced about the effectiveness of the June summit deal. It fell further following a widely expected interest rate cut by the European Central Bank on Thursday.
Deutsche Bank said the euro should reach $1.20 over the summer.
"Even though the ECB disappointed other markets by 'only' cutting interest rates, we think the cut in the deposit rate to zero is very significant for FX," the bank said on Monday. "This implicitly signals a greater ECB easing bias and a desire for a lower EUR," the bank said.
The euro has also dropped down the currency yield ranking, from fourth- to second-lowest yielder.
"Only the Swiss franc now has lower funding costs, and FX carry models are likely to further increase funding positions in the EUR, mostly to the benefit of the USD," Deutsche Bank said.
Fresh signs of slowing global economic growth also kept pressure on the euro.
Softer-than-expected Chinese inflation data on Monday added to concerns Europe's debt crisis was weighing on global growth, which is likely to stoke demand for the safe-haven dollar.
Meanwhile, Japan's core machinery orders - which strip out utilities and shipbuilding - fell at a record pace in May, but the market reaction was muted because it failed to change expectations the Bank of Japan will stand pat on policy at its meeting this week.
China and Japan's reports followed weak U.S. jobs data on Friday.
The Federal Reserve is prepared to do more to bring down U.S. unemployment and to steer inflation back up to the central bank's 2 percent target, a top Fed official said on Monday. (Reporting By Nick Olivari and Julie Haviv; Editing by Chizu Nomiyama)
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