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FOREX-Euro gains on ESM comments but underlying weakness remains
July 25, 2012 / 12:23 PM / 5 years ago

FOREX-Euro gains on ESM comments but underlying weakness remains

 * Euro jumps on Nowotny comments on ESM
 * Analysts say move overdone, see move back to $1.2050
 * High Spanish yields fan bailout concerns

 (Updates to U.S. trading, changes dateline, previous LONDON)
 NEW YORK, July 25 (Reuters) - The euro rallied against most
major currencies on Wednesday, recovering from a two-year low
against the dollar after a European Central Bank policymaker
said he could see grounds for giving the euro zone bailout fund
a banking license.
 The comments from Ewald Nowotny prompted a flurry of
short-covering as the euro jumped higher, with some investors
who had bet against the single currency being squeezed out of
those positions.
 But many analysts said the move was overdone and predicted
further weakness ahead. 
 "A banking license would allow the European Stability
Mechanism to leverage its balance sheet and give the fund far
greater ability to act in the euro zone credit markets, 
amplifying its power as backstop for European Union member
sovereign bonds," said Boris Schlossberg, managing director of
FX strategy at BK Asset Management. The euro/dollar "is grossly
oversold and due for some upside relief."
 The euro hit a session high of $1.2169 and was last
up 0.6 percent at $1.2131. 
 A banking license would give the European Stability
Mechanism more firepower to fight the debt crisis but analysts
said the market may have put too much emphasis on the comments,
given ECB opposition to date, and investors would likely sell
into the euro's rally. 
 "The market is desperate and jumping on anything that even
looks remotely positive," said Geoff Kendrick, currency
strategist at Nomura.
 It touched a two-year low on Tuesday against the dollar     
when some EU officials said Greece was unlikely to be able to
pay what it owes and further debt restructuring is likely to be
 The outlook remains deeply negative given spiraling Spanish
borrowing costs that have fueled concerns the country will need
a full sovereign bailout. 
 A break below support at the psychologically important level
of $1.20 would open up a test of the 2010 low.
 A worse-than-expected German business climate index ate into
some of the single currency's gains, adding to concerns activity
in the euro zone's largest economy is slowing down.
 Adding to concerns, the European Central Bank's latest
lending survey found banks made it harder for firms to borrow in
the second quarter and expected to see a slump in demand as the
euro zone debt crisis deepened. 
 Spain paid the second-highest yield on short-term debt since
the birth of the euro at an auction of three- and six-month
bills on Tuesday, indicating difficulties in future debt sales.
 Yields on Spanish debt have jumped since last week when the
region of Valencia said it would need financial help from
Madrid, with investors concerned other indebted regions will
also seek aid. 
 Delivering yet more bad news for Europe, Moody's changed the
outlook on its provisional top-notch rating for the European
Financial Stability Facility to negative.
 The action was expected given its move earlier in the week
to put a negative outlook on Germany, the Netherlands and
 Despite the bleak outlook, the euro's respite against the
dollar also pushed it higher against other currencies.
 Against the yen, it rose to 95.18 yen, having
carved out a new 12-year low of around 94.11 yen earlier in the
week. Traders in Tokyo cited talk of a euro/yen option barrier
at 94.00 and stop-loss offers under the level. The euro last
traded at 94.93 yen, up 0.7 percent. 
 The Australian dollar was about an Australian cent from a
recent record high against the euro, trading at
 The Australian currency gained against the U.S. dollar 
 after Nowotny's comments fanned demand for perceived
riskier currencies, climbing 0.6 percent to US$1.0281.

 (Reporting by Nick Olivari; Editing by James Dalgleish)

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