FOREX-Euro slides ahead of summit; yen tumbles
* EU summit may not yield meaningful outcome * Germany says euro bonds do not offer solution * Yen falls as Fitch downgrades Japan ratings By Wanfeng Zhou NEW YORK, May 22 (Reuters) - The euro fell against the dollar for the first time in three days on Tuesday as investors doubted whether an informal meeting of European leaders this week would yield much progress in tackling the region's debt crisis. The weakness in Europe's common currency suggested an uncertain outlook despite a fall in Spanish and Italian government bond yields, and some analysts said stretched positioning and oversold signals could lead to a short squeeze and a higher euro. While there have been hopes that Wednesday's summit may lead to agreement on measures to boost euro zone growth, investors were not confident of a breakthrough given apparent differences in opinion between Germany and France. French President Francois Hollande is expected to push for a joint euro zone bond, a measure backed by Italy, Spain and the European Commission. However Germany, Europe's largest economy, opposes the move and continues to champion austerity measures. "We don't expect Germany to cave and for any decisions to be made before the formal EU Summit which will be held after the Greek elections in late June," said Kathy Lien, director of currency research at GFT in Jersey City. "Nonetheless, the world will be listening in closely for any hint of cooperation," she added. If German Chancellor Angela "Merkel shows any willingness to compromise with Hollande, euro/dollar will rally." The euro was down 0.7 percent to $1.2718, edging back towards last week's four-month low of $1.2640. Concerns remained that Greece could leave the euro after elections next month, and about Spain's troubled banking sector. The Institute of International Finance said Spanish banks could need another 76 billion euros to cover loan losses. Against the yen, the euro rose 0.3 percent to 101.85 yen . The dollar rallied 1 percent to 80.10 yen. Important support for the yen is at its 200-day moving average around 78.53 yen. The yen tumbled after Fitch downgraded its credit ratings for Japanese government bonds to A-plus, citing the nation's rising public debt. But analysts doubted yen weakness could last. "The yen has been trading very strongly based on overall uncertainty over the last couple of weeks. So I think it might just be a little bit of a pullback. I don't necessarily think it's sustained," said Fabian Eliasson, vice president for currency sales at Mizuho Corporate Bank in New York. DOLLAR'S BID TONE Analysts said risk aversion remains a key driver in the current uncertain environment and with a shrinking universe of safe-haven currencies the U.S. dollar should retain a better bid tone overall. The U.S. dollar index, which tracks the value of the greenback versus a basket of six currencies, rose 0.5 percent to 81.513. Flows data from U.S. custody bank BNY Mellon showed that the U.S. dollar was the most bought currency on Tuesday, with net inflows accelerating in recent sessions at a pace that was twice as strong as seen last year. Among emerging markets, BNY Mellon data indicated that most high-yielding currencies remained under pressure. The bank said it saw steady outflows from the South African rand, Mexican peso, Russian ruble and Hungarian forint in recent sessions. The greenback held gains after data showed U.S. existing home sales rose 3.4 percent to their highest annual rate in nearly two years, although the market's reaction was limited "I think we're still a ways away from looking at an encouraging picture of the U.S. economy, though when it comes to housing, every little bit helps," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto. Also on Tuesday, the OECD said the United States and Japan were leading a fragile economic recovery among developed countries but that this could be blown off course if the euro zone fails to contain its debt crisis.
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