Euro edges higher vs dollar, but downtrend intact

A bank employee spreads out euro notes at a bank branch in Madrid January 13, 2011.

NEW YORK (Reuters) - The euro edged higher from a seven-month trough against the dollar on Tuesday, helped by a rebound in equity prices, but the lower trend looked to remain as Europe's debt crisis worsened.

The yen advanced against both the dollar and euro, keeping alive the possibility of intervention by Japan to weaken its currency. The yen has been the primary beneficiary of safe-haven flows lately after the Swiss National Bank took aggressive actions to weaken the Swiss franc.

France on Tuesday confirmed a report that Greek, German and French leaders would hold a conference call on Wednesday. The news, combined with a recovery in French bank shares, boosted the euro.

But few investors believed the currency's rebound would be sustained after a disappointing Italian debt auction in which borrowing costs soared and as fears persisted that Greece would default on its debt.

"The trend is still down for the euro," said Win Thin, senior currency strategist at Brown Brothers Harriman in New York. "The underlying dynamics for Greece, Italy and all these guys are still the same, so I remain very negative on euro zone."

The euro last traded at $1.3689, up 0.1 percent on the day. It earlier hit a session low of $1.35578 after Market News International reported China may not buy Italian debt, countering a report from the Financial Times.

The euro briefly pared gains after market talk that a Dutch finance official saw a Greek debt default as unavoidable, though this was later denied.

The euro came under pressure after the French president's office said no Franco-German statement on Greece was planned for Tuesday, dashing hopes that there would be some kind of support of for the debt-laden country.

On Monday, the euro had fallen as low as $1.34949, its weakest since February.

Morgan Stanley slashed its euro forecast, expecting the currency to decline to $1.30 by year end and $1.25 in the first quarter of 2012.

Against the yen, the single currency fell as low as 104.410 before moving back to 105.19, down 0.4 percent and off a 10-year trough of 103.900 yen hit on Monday.

SELL ON BOUNCE

Traders said real money remained a seller on rallies, with small sell-stop orders clustered around the $1.3720/25 level.

Key levels on the downside for the euro are the February low around $1.34280 and the 50 percent retracement of the euro's June 2010-May 2011 rally around $1.34082.

Pressure on the euro mounted after Italy paid higher borrowing costs to sell a new five-year bond.

Euro stress was also triggered by persistent talk that French banks could be downgraded by ratings agencies.

The dollar fell 0.5 percent to 76.84 yen, while against a basket of currencies, it slid from Monday's seven-month high of 77.784 to trade 0.7 percent lower at 77.026.

The euro was little changed against the Swiss franc at 1.2039 francs, hovering above the 1.2000 level at which the Swiss National Bank has vowed to rein in the franc.

"We still see a lot of risk aversion amongst investors," said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston. "Fundamentally we're still seeing the dollar, Swiss and yen being net bought and most of the other riskier emerging market and G10 currencies being net sold."

(Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Dan Grebler)