FOREX-Euro recovers as dollar selling resumes

Tue Sep 28, 2010 8:14am EDT

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* Dlr's bounce turns out to be brief

* Chinese and ECB comments cited as reason for sell-off

* Dollar/yen falls to lowest since intervention

By Anirban Nag

LONDON, Sept 28 (Reuters) - The struggling dollar slipped on Tuesday after a brief rally ran out of steam, while the euro recovered after a senior official said some European Central Bank emergency support may be withdrawn.

Traders also ascribed the dollar's drop to reported comments from a former Chinese central bank adviser who said a devaluation of the U.S. currency may be inevitable.

Against the yen, the dollar fell to its weakest since Japanese authorities stepped in to try and stem the currency's gains, sparking jitters they may intervene again.

Many traders expect the greenback's downtrend to continue, on a view that any future quantitative easing (QE) by the Federal Reserve, even in a modest form, would probably still be more aggressive than moves by other central banks.

"The China comments gave euro/dollar its biggest impetus as it made people think perhaps there would be a reserve shift out of dollars," said Adrian Schmidt, currency strategist at Lloyds.

The euro was lifted back into positive territory by comments from ECB Executive Board member Juergen Stark, considered a hawk, that the ECB may not renew some of its support measures when they mature at year end. [ID:nLDE68R0W8].

At 1203 GMT, the euro EUR= was up 0.1 percent at $1.3466, not far from a five-month peak of $1.3507 hit on Monday.

The euro earlier dropped as low as $1.3382 on speculation Spain's ratings may be downgraded by Moody's. [ID:nLDE68Q0TH].

The dollar index .DXY =USD fell back towards a seven- month low of 79.19 hit on Monday, standing at 79.427. It has lost more than 4 percent this month as investors sold the greenback on the back of a slow U.S. recovery.

"The dollar's trend remains lower and investors will be looking to sell at better levels," said Paul Mackel, director of currency strategy at HSBC.

YEN PUSHES HIGHER

The dollar fell as low as 84.05 yen JPY= on electronic trading platform EBS, traders said, its weakest since Sept. 15, when Japan sold nearly 2 trillion yen for dollars.

Support is seen at that low of 84.05, which marks the 61.8 percent Fibonacci retracement of its rise in the hours before and after Tokyo's yen-selling intervention on Sept. 15.

Some traders expect more dollar selling by Japanese exporters before the end of Japan's fiscal first half on Sept. 30. There are said to be some stop-loss orders around 83.90 yen.

Analysts said a narrowing spread between U.S. and Japanese two-year yields US2YT=RRJP2YT=RR also kept downward pressure on dollar/yen, but anxiety Tokyo may intervene if the yen gets up towards 82 per dollar helped check gains.

"There seems to be political pressure on the BOJ to ease policy further, but that is unlikely to alleviate much of the upward pressure that we are seeing on the yen from commercial flows," said Ian Stannard, senior currency strategist at BNP Paribas.

"So the downside risks for dollar/yen will remain and a further round of intervention will be required."

The Bank of Japan is divided about the need to ease monetary policy next week, which may mean it delays taking action despite government calls for central bank measures to support the economy. [ID:nSGE68Q0KS]

Sterling GBP=D4 rose to a 7-week high of $1.5896, helped by a narrower UK current account deficit for the second quarter and reports the European Union's annual farm subsidy to the UK would be converted into pounds at the end of the month.

(Additional reporting by Jessica Mortimer; editing by Chris Pizzey)

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