FOREX-Euro pressured, dollar rises on risk aversion

Fri Feb 5, 2010 4:19am EST

* Dollar index hits 7-mth high, euro/dollar at 8-mth low

* Risk aversion remains, Greece woes, US payrolls in focus

* SNB seen selling francs in Asia, SNB, BIS decline comment

(Updates throughout; previous TOKYO)

By Neal Armstrong and Naomi Tajitsu

LONDON, Feb 5 (Reuters) - The dollar hit a seven-month high against a currency basket on Friday as a widening in euro zone government bond spreads highlighted fears over the indebtedness of the region's weaker economies, spurring risk aversion.

The euro fell to its weakest versus the dollar since May 2009 and was unable to sustain gains made against the Swiss franc after the Swiss National Bank was seen selling its domestic currency in Asian trade, which had lifted the euro from a 15-month trough.

The yield spread between Greek and German 10-year government bonds expanded to 368 basis points in early European trade as investor confidence in Athens' ability to service its debts kept its bond market under pressure.

Analysts said market movements were being driven by a combination of euro weakness and dollar strength, while the yen was also benefiting from risk aversion.

"Widening euro zone CDS and bond spreads over German Bunds are making investors less confident, which is weighing on the euro and putting pressure on equity markets," said Jeremy Stretch, strategist at Rabobank in London.

"That is leading to the risk-aversion trade which means the dollar is in favour."

A fall on Wall Street on Thursday, the euro zone's sovereign debt problems and an unexpected rise in U.S. weekly jobless claims, coming just ahead of key U.S. monthly jobs data later on Friday, all made for jittery markets.

The dollar index .DXY, which tracks its moves against a basket of currencies, climbed as high as 80.435, its strongest since July 2009 as European shares .FTEU3 fell nearly 1 percent early in the session.

The euro EUR= fell as low as $1.3649 according to Reuters data, its weakest since May 2009. By 0853 GMT, it traded at $1.3680, down half a percent on the day.

Versus the yen, the single European currency EURJPY=R fell to a session low of 121.99 yen, hovering in range of 121.54 yen hit on Thursday for the first time since February 2009.

The single currency was also pressured by comments from European Central Bank President Jean-Claude Trichet, who on Thursday said many members of the euro zone will have large and sharply rising fiscal imbalances. [ID:nECBNEWS]

FRANC SELLING

The euro EURCHF= traded 0.3 percent higher at 1.4697 Swiss francs but pulled back from a high of 1.4905 francs hit on trading platform EBS in Asian trade.

Traders said the Swiss National Bank bought euros for francs in a rare foray into Asian trading time, with the central bank said to have traded on EBS, having entered the market around 1.4700 francs.

The euro had earlier fallen as far as around 1.4550 francs in thin trade, its weakest level since October 2008, and the market was already wary that it had dropped to levels which might prompt central bank action.

The SNB, which intervened a number of times in 2009, has said in the past it would continue to prevent any excessive rise in the franc as long as there were deflationary risks.

Spokesmen for the central bank and the Bank of International Settlements declined comment. [ID:nWEB8427] (Editing by Mike Peacock)

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