FOREX-Euro restrained by worries about Greek debt

Wed May 11, 2011 6:04am EDT

Related Topics

* Euro hurt by uncertainty over aid package for Greece

* Risks of contagion could see euro slip further

* Sterling gets a lift from BOE Inflation Report

(Adds details, sterling reaction, updates prices)

By Anirban Nag

LONDON, May 11 (Reuters) - The euro consolidated on Wednesday, but risks were to the downside on mounting uncertainty over whether euro zone officials would provide timely financial aid to debt-laden Greece and Portugal.

Stabilising commodity prices provided support to growth-linked currencies like the Australian dollar AUD=D4. Traders said some investors were increasingly expressing a bearish view on the common currency by adding to bullish bets on the Australian dollar against the euro EURAUD=R.

For column please click on [ID:nLDE7490D5].

Sterling GBP=D4 gained to a session high of $1.6489 after the Bank of England raised its medium-term inflation forecasts in its Quarterly Inflation Report. That drove investors to fully price in the chance of a quarter percentage rate hike in December, compared to January before the report was released BOEWATCH [ID:nLDE74A10B].

Sterling also rose to a session high versus the euro.

The euro traded at $1.4390 EUR=, marginally lower on the day, but above a three-week low of $1.4254 hit on Monday. Asian central banks bought the euro at dips but traders cited decent-sized offers at $1.4420-25 with layers of stops from hedge funds above that area. Some expect the common currency to face resistance around $1.4441 -- this week's high.

"Euro/dollar is being dominated by concerns about Greece and Portugal and the contagion concerns that triggered a selloff last week could see the common currency fall further," said Adam Myers, senior forex strategist at Credit Agricole.

"If this trend continues, it can test lows of $1.4250 and then $1.4160." The euro had hit a low of $1.41560 on April 18.

The euro was also weighed down by comments from a German deputy finance minister who said that euro zone officials will debate Greece's debt crisis next week but no decision will be taken. He added the sovereign debt crisis in some European countries was not a crisis of the euro. [ID:WEA0239]

Some traders said uncertainty over whether Greek debt would be restructured or not would drive nervous investors to unwind bullish bets in the single currency further.

Speculators' net long positions hit the highest since July 2007 in the week to May 3. But a wave of selling in the euro has gathered pace since last Thursday, toppling the currency from a 17-month peak of $1.4940.

The euro had got a brief boost on Tuesday after a Dow Jones news agency report, citing a senior Greek government official, as saying Athens expects to receive a new aid package totalling nearly 60 billion euros ($87 billion) in June. [ID:nLDE7490UN]

Although Greece denied the report, some market players expect additional funding sooner or later given fears that other options -- such as debt restructuring or even an exit from the euro zone by Greece -- would be more painful and cause more losses among European banks.

MORE WORRY

Greece is not the only source of worry for investors, with Finland delaying a parliamentary vote on the EU's Portugal bailout plan to Friday from Wednesday because the country's second-largest party remained undecided.

The Finnish parliament's approval is important because it, unlike others in the euro zone, has the right to vote on EU requests for bailout funds. The leader of Finland's third-biggest party reiterated his opposition to Portugal aid. [ID:nLDE74910V] [ID:nLDE74A0TX]

But traders are also weighing the euro zone's troubles with another big theme that has driven the market this year -- dollar weakness stemming from the Federal Reserve's reluctance to raise interest rates from near zero.

In contrast, the European Central Bank has raised rates in April and is expected to raise them further.

The dollar index .DXY stood at 74.48, down 0.2 percent on the day, but well above a three-year low of 72.696.

"It looks too early to call this a major reversal in the dollar," said Chris Turner head of fx strategy at ING. "Our view has been that with little to emerge in fresh policy from the Fed ahead of its June 22 meeting, the dollar-funded carry trade would be a dominant theme for the second quarter."

The greenback was flat against the yen at 80.81 yen JPY=, off a seven-week low of 79.57 yen last Thursday.

The Aussie stood at $1.0875 AUD=D4, up 0.3 percent on the day, weathering disappointment from the Chinese data. Chinese industrial production and retail sales fell short of market expectations and weighed on riskier currencies but they quickly pared losses as China shares recovered. (Editing by Stephen Nisbet)

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