FOREX-Euro trims gains on euro zone concerns

Fri May 27, 2011 8:20am EDT

Related Topics

* Euro trims gains vs dollar, hits record low vs Swissie

* Euro zone banking concerns weigh; US data awaited

* Analysts see more CHF gains on strong Swiss economy

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By Naomi Tajitsu and Jessica Mortimer

LONDON, May 27 (Reuters) - The euro trimmed gains against a broadly weaker dollar and hit a record low against the safe-haven Swiss franc on Friday on persisting concerns about the economic health of some euro zone countries.

The dollar stayed under pressure following weak U.S. data on Thursday. Further numbers on Friday, including University of Michigan sentiment, could put more pressure on the currency, although traders said moves would be limited ahead of a long weekend in the UK and United States. ECONUS

The combination of negative dollar sentiment and concerns about euro zone debt was expected to keep the euro in a range above $1.4000 but below last Friday's high around $1.4345.

"Some in the market are looking to bet against the dollar on speculation that the Federal Reserve could restart quantitative easing after June, which should help the euro," said Roberto Mialich, currency strategist at Unicredit in Milan.

"But the market is also recognising there is no great upside potential for the euro," he said, adding he expected the single currency would struggle to close above $1.4250.

The Swiss franc, which also hit a record high versus the dollar, was seen continuing its climb as Switzerland's economic and fiscal health far outshines that of the euro zone average.

Traders cited widening spreads between peripheral and core euro zone bond yields behind the euro's weakness, as well as concerns about banking sector health as Franco-Belgian group Dexia (DEXI.BR) said it would take a large loss as it stepped up asset divestments. [ID:nLDE74Q0MF]

Widening yields are a sign of growing concerns about how several countries will recover from deep-seated fiscal problems, given ongoing divisions among policymakers on how Greece will tackle its enormous debt.

The euro EUR= traded 0.7 percent higher on the day at $1.4231, retreating from $1.4278, a one-week high hit in earlier trade. Offers from Asian sovereign names above that level were seen capping the single currency's upside.

Above that, the euro's 55-day moving average around $1.4320 may provide an obstacle, along with resistance around $1.4335 -- the 38.2 percent retracement of its decline this month.

"The market is finding it fairly difficult to hold onto positions. If we're back in the ugly competitions between the euro and the dollar, both have fairly big negatives," said Jeremy Stretch, currency strategist at CIBC.

Analysts said the session suggested investors were unwilling to take on big positions in either the dollar or the euro given the problems with debt and growth on both sides of the Atlantic.

Some investors remain optimistic that European nations will ultimately reach an agreement on dealing with Greece despite suggestions Athens may not receive the next tranche of IMF aid. [ID:nLDE74P1Z2]

SWISSIE AT RECORD HIGHS

Investors' unwillingness to get too excited about the euro was evident by its fall to a record low of 1.2167 Swiss francs EURCHF=R on the EBS trading platform. Due to its safe-haven status, the franc often gains during times of uncertainty.

The dollar hit a record low of 0.8534 francs on EBS, and was last down 1 percent at 0.8572 CHF=.

Analysts said the franc was also boosted by a strong Swiss economy -- highlighted by a strong reading of the KOF economic indicator for May -- and the view that Swiss interest rates will rise in the coming months. [ID:nZCHQGE790]

"The Swiss franc has all the right characteristics at the moment: a current account surplus, a strong fiscal balance, and we are getting closer to when relative rates will move in favour of the franc again," said Kasper Kirkegaard, currency strategist at Danske in Copenhagen.

He added a fall in the euro below 1.20 francs was imminent.

The dollar hit a three-year low versus the New Zealand dollar NZD=D4 after data on Thursday showed fresh signs of a slowdown in the U.S. labour market and the second estimate of first quarter growth came in below forecasts. [ID:nN26233734]

(Editing by Patrick Graham, John Stonestreet)

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