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FOREX-Euro stays weak on profit-taking, dollar recovers
March 1, 2012 / 11:51 AM / 6 years ago

FOREX-Euro stays weak on profit-taking, dollar recovers

* Euro retreats from recent highs after ECB cash injection

* Dollar recovers as Bernanke gives no QE hint

* EU summit in focus, market wary of euro zone weakness

* Morgan Stanley raises end-Q1 EUR/USD forecast to $1.34

By Jessica Mortimer

LONDON, March 1 (Reuters) - The euro remained weak against the dollar on Thursday on profit-taking after a huge injection of cash by the European Central Bank, with further losses likely due to concerns about debt and a fragile euro zone economy.

The dollar also gained support after U.S. Federal Reserve Chairman Ben Bernanke on Wednesday gave no signal the central bank would undertake further bond purchases.

The euro was steady at $1.3320, near a one-week low of $1.3305 hit in early trade. This took it well below a high of $1.3486 hit in anticipation of the ECB’s cheap loans.

Attention on Thursday turned to a European Union summit and a meeting of euro zone finance ministers to discuss Greece’s progress on meeting the terms of its bailout. Analysts said this may highlight the risks of Greece struggling to comply with the harsh austerity measures demanded of it.

Traders reported early euro selling by Asian central banks and macro funds, with many cutting euro positions as the ECB’s injection of 530 billion euros in three-year funds had been broadly priced in.

“Any rebound feels like it will be sold into unless there is a sustained improvement in euro zone fundamentals,” said Valentin Marinov, currency strategist at Citi.

“The LTRO (ECB long-term refinancing operation) brings us back to the situation earlier this year when the euro was considered the (carry) funding currency of choice”.

Traders said the $1.35 level could now act as stiff resistance if the euro moves higher, with many investors looking to sell into any rally.

Options traders reported growing demand to buy protection against the euro turning lower against the dollar, suggesting that many expect it to consolidate its recent gains. Risk reversals showed an increase in the premium charged to buy euro puts (bets on it falling) versus the dollar.

Any euro falls are likely to be tempered by factors such as oil exporters converting their dollar revenues into euros and by the fact that market participants remain very short of euros, leaving room for short-covering euro rallies, Citi’s Marinov said.

The euro held above its 100-day moving average at $1.3293, but traders said a fall below there could push it towards $1.32.

Morgan Stanley analysts were more upbeat on the euro’s immediate prospects, raising their end-March euro/dollar forecast to $1.34 from $1.27. They still expect the euro to decline sharply by the end of the year, though now see it at $1.19 rather than $1.15.

There was some optimism that the ECB’s flood of cash would help the banking sector out of trouble and may give a boost to riskier assets and currencies.

But market participants were mindful that the euro zone’s structural debt problems could not be solved unless the euro zone economy picks up.

PMI data on Thursday showed the euro zone’s manufacturing sector contracted for the seventh straight month in February. In Greece, it shrank at its fastest rate in at least 13 years.

DOLLAR RECOVERS

The dollar stood at 78.763 against a basket of currencies , above a three-month low of 78.095 hit on Wednesday as it recovered after Bernanke’s testimony, although he gave a tempered view of the U.S. recovery.

But RBC analyst Adam Cole said more monetary easing from the U.S. was still possible and the market may have overreacted to the lack of any reference by Bernanke to more QE. This could help a modest recovery in risky assets.

“The market is likely to price out the good news from the Fed,” he said, adding the euro could squeeze up to around $1.35.

The dollar was down 0.2 percent against the yen at 81.04 yen, hurt by profit-taking. However, it stayed close to a nine-month high of 81.661 yen hit on Monday as the yen remains under pressure after Bank of Japan easing measures.

The Australian dollar rose 0.25 percent to $1.0759, helped by robust Chinese PMI data, though it was well below a seven-month peak of $1.0857 hit on Wednesday. (editing by Ron Askew)

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