Thursday, 17 November 2011

Euro Gains Pared Amid Debt Concerns

-- Euro briefly up above $1.35, but fails to sustain gain
-- Underlying sentiment for euro stays weak
-- Rise in dollar-funding could work in favor of dollar, but against euro, Australian dollar
   By Tatsuo Ito 
TOKYO (Dow Jones)--The euro rose Friday against the dollar in Asia on short-covering but the gains were later pared as underlying sentiment for the single currency remains weak, with a rise in borrowing costs for Spain and France casting doubts over Europe's efforts to contain the sovereign debt crisis anytime soon.

The euro briefly rose above $1.3500 partly as uncertainty about whether the U.S. will reach an agreement on cutting its fiscal deficit next week prompted some traders to sell dollars against the euro. But the euro failed to sustain the rally. At 0450 GMT, the euro was at $1.3478 from $1.3456 late Thursday in New York, according to EBS. It was at Y103.59 from Y103.60.

"Further falls in the euro could be unavoidable," Hirotsugu Inoue, executive director of foreign exchange at UBS in Tokyo. "I wouldn't be surprised if it falls to $1.300 in the next week or so," he added.

At an auction to sell EUR3.563 billion of 10-year bonds Thursday, Spain was forced to pay an average yield of 6.975%--just below the 7% level at which Greece, Portugal and Ireland were forced to seek bailouts. France also issued a series of medium-term bonds, including EUR3.33 billion in July 2016 debt at 2.82%, up from 2.31% at the previous auction.

The rise in yields reflects investors' demand for higher risk premiums as a comprehensive agreement laid out by European leaders in October failed to assure them that its sovereign debt problem will be solved soon.

"The euro will remain in focus and the downward trend could continue," said Osao Iizuka, head of FX trading at Sumitomo Trust and Banking. The European Central Bank apparently bought European government bonds including Spanish and French bonds to prevent their yields from surging.
"The ECB's purchases have distorted the bond market. Without those purchases the yields would have risen further and thus the euro should have been sold further," Iizuka said.

The spread between LIBOR and overnight indexed swap rates--regarded as a measure of the health of the banking system--has widened as concerns about European and U.S. financial institutions have grown.

Iizuka said that in the ongoing risk-averse environment, rising demand for dollar-funding tends to work in favor of dollar buying while the euro and the Australian dollar are likely to be sold.

The dollar was at Y76.87 from Y77.06 and at CHF0.9134 from CHF0.9220. The U.K. pound was at $1.5774 from $1.5753.

The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 78.19 from 78.309.
Interbank Foreign Exchange Rates At 2250 EST / 0450 GMT 
                         Latest     Previous   %Chg    Daily    Daily   %Chg 
                                    2150 GMT            High     Low    12/31 
USD/JPY Japan            76.88-90   76.96-07   -0.12    77.03    76.88  -5.21 
EUR/USD Euro            1.3491-94   1.3456-59  +0.26   1.3504   1.3448  +0.76 
GBP/USD U.K.            1.5779-84   1.5753-58  +0.17   1.5788   1.5740  +1.11 
USD/CHF Switzerland     0.9182-88   0.9219-22  -0.38   0.9222   0.9183  -1.76 
USD/CAD Canada          1.0274-80   1.0289-95  -0.14   1.0296   1.0270  +3.31 
AUD/USD Australia       1.0021-26   0.9998-01  +0.24   1.0038   0.9974  -2.06 
NZD/USD New Zealand     0.7619-24   0.7586-93  +0.42   0.7622   0.7578  -2.24 
Euro Rate 
EUR/JPY Japan           103.73-76   103.59-81  +0.04   103.91   103.54  -4.50 
Source: ICAP Plc. 
-By Tatsuo Ito, Dow Jones Newswires; +813-6269-2780;