Euro bounces back, boosted by auctions, Draghi

Euro and Swiss Franc notes are seen in this illustration picture in Lausanne August 9, 2011.

NEW YORK (Reuters) - The euro climbed to a one-week peak against the U.S. dollar on Thursday as a solid sale of Spanish and Italian debt and more upbeat comments about the euro-zone economy from the European Central Bank chief eased concerns about the region's debt.

Spain sold the targeted amount at its auction of a new, three-year bond and two existing bonds maturing in 2016, while yields halved at an Italian sale, reflecting the success, at least for now, of what amounts to a back-door bailout by the ECB.

The ECB, meanwhile, held rates steady at 1 percent as widely expected after two successive rate reductions, with bank president Mario Draghi citing "signs of stabilization activity at low levels" in the euro zone economy.

Draghi also said the ECB's flood of cheap, three-year money is helping the euro-zone's banking system substantially and supporting confidence in the bloc's economy, which is showing some signs of stabilization.

His comments further drove bids in the euro, as it squeezed higher through the $1.2800 level.

"The ECB's decision to hold rates steady at 1 percent is enough sign of confidence that European financial leaders believe the Eurozone economy will stabilize and the crisis can be managed," said Jonathan Lewis, chief investment officer at Samson Capital Advisors, with assets under management of around $7 billion.

"Though criticized as cautious and slow moving, the ECB is demonstrating it is a staunch defender of the value of its currency."

In late afternoon New York trading, the euro was about 1 percent higher at $1.28297, having touched a session high of $1.28460 on trading platform EBS. That is up sharply from a 16-month low of $1.26615 hit on Wednesday.

That said, the euro is not out of the woods yet. Traders said the bias in euro/dollar remains lower below the $1.2860 level. If the pair gets above that, that should encourage further short-covering.

For Greg Fuzesi, economist at JP Morgan Chase in London, "stabilization" in activity in the euro zone meant zero economic growth, which implies further increases in unemployment and contained inflation risks.

"So our sense is that the ECB's bias remains towards cutting rates. Only the urgency is less," Fuzesi said.

On the auctions, yields on benchmark 10-year yields on Spanish and Italian debt fell, extending this week's slide and retreating from levels near which other euro-zone countries have requested debt bailouts. The slide in yields helped the euro's cause as well.

Italy will launch its 2012 bond issuing campaign on Friday when it offers up to 4.75 billion euros of debt, including its three-year benchmark and two off-the-run issues.

Draghi was less pessimistic about the euro-zone outlook but also aware that downside risks remain, a point taken up by some analysts.

"Our suspicion is that the euro zone will suffer further appreciable economic weakness over the early months of 2012, at least, and we expect the ECB to respond by cutting interest rates further," said Howard Archer, chief European and UK economist at IHS Global Insight in London.

"And we anticipate that mounting evidence of retreating inflationary pressures will give the ECB increasing scope to act."

Archer said his firm is forecasting the ECB to trim interest rates by a further 25 basis points, to 0.75 percent, within the next couple of months.

"We also believe that interest rates could very well come down as low as 0.50 percent by mid-2012."

Lower rates are negative for the euro as it makes higher yielding currencies more attractive to investors.

U.S. data on Thursday disappointed investors who were earlier encouraged by signs of an improving economy. U.S. initial claims for jobless benefits hit a six-week high and retail sales rose at the weakest pace in seven months in December.

Euro/dollar gains pushed the dollar 0.7 percent lower versus a currency basket to 80.770 .DXY, but it was within sight of 81.49 hit on Wednesday, its highest in 16 months.

Against the yen, the dollar was down 0.2 percent at 76.770.

(Additional reporting by Julie Haviv; Editing by Chizu Nomiyama)