FOREX-Euro falls as Germany dampens summit expectations

Wed Dec 7, 2011 6:41am EST

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* Euro dips after German official warns of summit pessimism
    * Some support for euro seen ahead of ECB meeting Thursday
    * Better-than-expected demand at German Bund auction

    By Nia Williams	
    LONDON, Dec 7 (Reuters) - The euro turned negative
versus the dollar on Wednesday after comments from a senior
German official dispelled some cautious optimism that European
leaders will take decisive steps to contain the region's debt
crisis at a summit on Friday.   	
    Berlin is increasingly pessimistic about the chances of a
deal to solve the debt crisis at the summit, because some
governments do not seem to grasp the gravity of the situation, a
German government official said. 	
    The euro dipped to a session low of $1.3373,
triggering reported stop-loss orders below $1.34.	
    Market players said the move was exacerbated by thin
end-of-year liquidity conditions, and there were supporting bids
from Asian central banks around $1.3350-60. 	
    "This is a bit of an eye-opener. Markets have taken quite a
gloomy reading of the comments, just when there had been some
tentative optimism building," said Neil Mellor, currency
strategist at Bank of New York Mellon.	
    Despite the slide, the single currency held above the
previous session's low near $1.3334. Strategists said investors
would be wary of initiating positions ahead of the EU summit and
a European Central Bank rate decision on Thursday.	
    A key focal point of the summit is whether euro zone leaders
make enough progress toward fiscal integration and more
stringent fiscal discipline to open the way for the ECB to take
a greater role in stabilising euro zone bond markets.  	
    The ECB is widely expected to announce a rate cut on
Thursday and, following hints from ECB President Mario Draghi
last week, some market players are also starting to position for
the possibility the central bank may step up its crisis-fighting
measures. 	
    Analysts said these expectations were likely to support the
euro, and offset some of the impact of Germany's comments.	
    "The market has again and again bought into the idea of a
comprehensive and convincing solution from policymakers so there
is potential for some short-term upward movement in the euro
today," said Ulrich Leuchtmann, head of currency research at
Commerzbank.	
    "Some people are also preparing for the ECB to announce
something more drastic."	
    Investors are also focusing on possible initiatives to
increase the capabilities of rescue funds that could help
backstop euro zone governments hit by debt market turmoil.  	
    Euro zone officials have said euro zone leaders may decide
on Friday to raise the combined lending limit of their temporary
and permanent bailout funds to boost the firewall they hope will
contain the spread of the sovereign debt crisis. 
 	
    Technical analysts warned disappointing results from the
summit could drag the euro down to levels near $1.3215, with a
clear breach of that support opening the way for a drop to the
$1.3140/50 area.	
    	
    SNB SPECULATION BUILDING 	
    The single currency showed little reaction to
better-than-expected demand at a five-year German Bund auction
that nevertheless soothed some concerns that investors may start
shunning the euro zone's strongest economy. 	
    Markets were rattled and the euro fell last month when
Germany suffered one of its least successful debt auctions since
the launch of the single currency, with investors put off by low
returns. 	
    The euro was flat against the Swiss franc at 1.2415 francs
. It earlier spiked to around 1.2440 francs after the
Swiss finance minister said authorities were considering
negative rate and capital control options to curb the franc's
strength. 	
    The single currency also jumped higher than the previous
session following a steep fall in Swiss consumer prices, which
raised speculation the Swiss National Bank may raise the floor
in euro/Swiss.  	
    There was talk of hedge funds buying euro/Swiss franc call
options with a strike price at 1.2500 francs that are due to
expire in the next week or two. In addition, traders cited talk
of a large euro/Swiss franc option barrier at 1.2500 francs. 	
    The Australian dollar rose 0.2 percent to $1.0250,
supported by data showing Australia's economy grew a brisk 1.0
percent in the third quarter from the previous three months.
       	
    The dollar held steady versus the yen at 77.72 yen.
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