Euro sees some reprieve, outlook still bleak

SYDNEY Tue Oct 4, 2011 7:00pm EDT

A picture illustration shows a 100 Dollar banknote laying on various denomination euro banknotes, taken in Warsaw, January 13, 2011. REUTERS/Kacsper Pempel

A picture illustration shows a 100 Dollar banknote laying on various denomination euro banknotes, taken in Warsaw, January 13, 2011.

Credit: Reuters/Kacsper Pempel

SYDNEY (Reuters) - The euro fought to hold gains early in Asia on Wednesday, having been swept higher by a wave of short covering sparked by news euro zone ministers were considering ring fencing the region's banking sector from the sovereign debt crisis.

The euro jumped from a near nine-month trough against the dollar and climbed from a decade low versus the yen, although it is struggling to push higher.

Unless euro zone authorities take swift action, the news is unlikely to have a lasting impact on the euro, said Joseph Capurso, strategist at Commonwealth Bank in Sydney.

"The bottom line is there is still going to be a lot of safe-haven bid for the U.S. dollar because the world economy has slowed appreciably. That means the euro, Aussie and others will be going down against the U.S. dollar," he added.

The common currency last stood at $1.3314, having climbed as high as $1.3369. But it was still well off Tuesday's low around $1.3144. Against the yen, it traded at 102.21, up from Monday's trough around 100.71.

Analysts at BNP Paribas warned the euro could still fall below $1.3000, but said better two-way trades in EUR/USD and EUR crosses looked possible in the days ahead.

The euro's bounce also came after France and Belgium rushed to the aid of Dexia SA, in what will be the first state rescue of a European bank in the euro zone sovereign debt crisis.

There was little reaction to Moody's move to slash Italy's bond ratings by three notches to A2, which brought it in line with Standard & Poor's.

However, a Moody's analyst later said Italy's credit rating could come under further downward pressure if the euro zone sovereign debt crisis is not resolved and access to long-term funding is diminished.

Commodity currencies also received a fillip as Wall Street staged a dramatic turnaround to end more than 2 percent higher. The Australian dollar rebounded to $0.9543 from a one-year low of $0.9388 plumbed overnight.

Helping lift risk sentiment was Federal Reserve Chairman Ben Bernanke, who said the U.S. central bank was prepared to take further steps to bolster the U.S. recovery.

This saw the dollar index dip to 79.099, retreating from a nine-month high of 79.838 set on Tuesday.

The dollar drifted up against the yen to 76.75 from Tuesday's low around 76.51. The currency pair remained stuck in a narrow range, trapped by the threat of more yen-weakening intervention by Japanese authorities.

There is little in terms of market-moving data in Asia with retail sales in Australia likely to provide only a brief distraction. Later, service sector PMIs for Europe and the United States are due.

(Editing by Wayne Cole)