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FOREX-Euro higher on ESM comments but underlying weakness seen
July 25, 2012 / 3:08 PM / 5 years ago

FOREX-Euro higher on ESM comments but underlying weakness seen

 * Euro jumps on Nowotny comments on ESM
 * Analysts say gains not justified, see move back to $1.2050
 * High Spanish yields fan bailout concerns

 (Updates prices, adds details, adds quotes.)
 NEW YORK, July 25 (Reuters) - The euro rose against most
major currencies o n 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.
 The euro got an added boost when Spain and France said on
Wednesday in a joint statement that stability of the euro area
needs the adoption of a single supervisory mechanism for the
bloc's banks by the end of this year..
 ECB Governing Council member Christian Noyer added to
positive sentment when he said on Wednesday that Europe needs to
implement unified banking supervision, a deposit guarantee
scheme and a banking resolution fund..
 But many analysts said the move to the upside was overdone.
 "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 0.5 percent at $1.2122.
 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 grasping for any positive news," said Omer
Esiner, chief market analyst at Commonwealth Foreign Exchange in
Washington, D.C. "It adds to the already somewhat improved tone.
Whether or not it lasts is the question."
 The euro 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 necessary. 
 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.
 The U.S. dollar did pare losses against the euro after data
showed new U.S. single-family home sales in June fell by the
most in more than a year and prices resumed their downward
trend, suggesting a setback for the budding housing market
recovery. But that impact was short lived. 
 "Overall, the data adds to the string of soft U.S. numbers
that suggest we could see further quantitative easing from the
Federal Reserve," said Vassili Serebriakov, senior currency
strategist, Wells Fargo in New York. "While this may dim risk
appetite a bit and help the dollar as a safe haven, ultimately
this would be a negative for the U.S. currency because of the
possibility of further easing."
 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 as high as 95.20 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 94.82 yen, up 0.6 percent. 

 (Reporting by Nick Olivari; additional reporting by Gertrude
Chavez-Dreyfuss, editing by Dave Zimmerman)

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