FOREX-Euro hit by uncertainty about Greek debt aid

Fri Jun 10, 2011 8:10am EDT

Related Topics

* Euro slips on Greece concerns, ECB rate outlook

* Downside risks seen, support at $1.4419

* Dollar/yen hovers near 80.00 yen, safe-haven bidding

(Updates prices, details, fresh comments)

By Nia Williams and Naomi Tajitsu

LONDON, June 10 (Reuters) - The euro fell against the dollar on Friday and could extend its losses as worries over Greek debt return to centre stage while investors scale back expectations of the pace of European Central Bank interest rate hikes.

Investors received mixed messages about the progress of debt assistance to Greece, with Germany sticking to its demand that private investors contribute to a second bailout even after renewed ECB opposition to any investor participation that might be deemed involuntary. [ID:nLDE7590LU] [ID:nLDE7581Z8]

The lack of unity among euro zone officials further rattled the currency market, adding to concerns that the crisis could drag on for some time and keep the euro subdued.

ECB President Jean-Claude "Trichet has deepened the impasse between the ECB and Germany ... and it's difficult to know if or how we will see a compromise on the Greek debt issue before deadlines later this month," said Jane Foley, currency strategist at Rabobank.

"Given this uncertainty, the market is playing safe," she said, explaining the demand to sell euros.

The euro EUR= slipped 0.3 percent on the day to $1.4460, having slumped as low as $1.4442 in early European trade.

The single currency initially received a boost after Germany's Bundestag voted to approve new aid to Greece, but the move was not enough to recoup its losses. [ID:nB4E7H6010]

Market participants said buying from Asian sovereign names in the mid-$1.44 region was limiting more near-term losses.

Support is seen at $1.4419, a 38.2 percent retracement of the May 23-June 7 rally, but traders who said they had added to long euro positions at $1.4450 said they had stop-loss orders to sell if the euro falls below $1.4420.

Market players had already priced in the July rate hike flagged by Trichet on Thursday, but an unchanged 2012 inflation forecast suggested further tightening might be slower than previously thought, which stung the euro.

"Markets are having a rethink over what they priced in for the ECB in the medium term. We have a hike signalled in July, but is that going to be followed by a prolonged pause?" said Jeremy Stretch, head of currency strategy at CIBC World Markets.

Trichet on Thursday cemented the market's view that the ECB will raise rates in July, but another hike is not priced into the market until early 2012. ECBWATCH

The ECB stuck to its 2012 inflation outlook, surprising investors who had been expecting them to flag increasing price pressures. Markets have been scaling back rate rise expectations since last week, when a third hike was anticipated before the year is out.

Stretch said euro zone banking stress tests, the relentless peripheral debt problems and the end of U.S. quantitative easing this month would combine to push the euro lower.

"It's a case of the market betting the ECB is not going to be as hawkish as was assumed. We think the euro/dollar will be at $1.3800 by the end of the summer," he said.

YEN STRENGTH

The yen was up against the dollar and euro, benefiting from a risk-off sentiment in the market, stemming from recent weaker macroeconomic data from around the globe that also pushed commodity currencies lower.

The euro was down 0.6 percent at 115.90 yen EURJPY=, not far from a 1 1/2-week low of 115.51 yen struck earlier in the session, while the dollar fell 0.2 percent to 80.12 yen JPY=.

Traders said order books were weighted towards dollar sellers after the greenback hit a one-week high of 80.47 yen on Thursday, and reported options barriers being defended at 79.50.

Japanese importers and investors were expected to show strong buying interest below 80 yen, traders said. The dollar index .DXY rose 0.2 percent 74.323, close to a one-week high.

Sterling initially dipped to a two-week low of $1.6215 GBP=D4 after UK industrial output data dropped much more than expected in April, but clawed back due to a lack of follow-through selling. [ID:nLDE7590IX]

The Australian dollar AUD=D4 fell 0.2 to $1.0612, having been hit this week by data showing a slowdown in Australian employment growth and a statement from the central bank interpreted as showing no urgency to raise rates. (Editing by Ruth Pitchford)

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