FOREX-Euro lifted by hopes of Fed action, outlook shaky

Tue Jun 19, 2012 7:43am EDT

Related Topics

* Euro recovers vs dollar as Fed meeting eyed

* Australian dollar rises to 6-week high vs dollar

* Euro zone data, news add to bearish picture

By Nia Williams

LONDON, June 19 (Reuters) - The euro climbed against the dollar on Tuesday, shrugging off a weak German economic sentiment survey as speculation the U.S. Federal Reserve may ease monetary policy lent support to perceived riskier currencies.

Gains looked vulnerable to the stream of negative news coming out of the euro zone, as wary investors awaited the result of Greek coalition negotiations that may lead to the country's bailout terms being renegotiated.

But in the near-term the euro could hold steady on expectations the Fed will extend its long-term bond-buying through Operation Twist by a few months from the current deadline of June after a series of disappointing U.S. data, analysts said.

The euro was last up 0.3 percent on the day at $1.2622, with support seen around $1.2536, the trendline drawn below daily lows from June 1, and the 21-day moving average at $1.2530.

"It's quite possible the euro will stay reasonably well supported and if the Fed do something we could see a temporary spike higher. Operation Twist is close to market consensus but may give the euro a bit of a short-lived boost," said Paul Robinson, head of European FX research at Barclays.

Strategists said the euro would struggle to rally beyond the one-month high of $1.2748 posted on Monday after a win for pro-bailout parties in the Greek election, given the dire economic outlook and worries about the Spanish banking system.

News that a second, more detailed audit of Spanish banks would be delayed until September fuelled bearishness towards the euro zone's fourth-largest economy, whose 10-year borrowing costs have ballooned above 7 percent.

Spain's Treasury sold 12- and 18-month debt on Tuesday at higher yields of over 5 percent and will sell between 1 billion and 2 billion euros of bonds on Thursday.

Investors were also unnerved after a German court said the government had not consulted parliament sufficiently about the configuration of Europe's permanent bailout scheme.

"The market has taken this negatively," said Gavin Friend, currency strategist at National Australia Bank, referring to the comments from the German court.

"We would like more details but the market wants to shoot first and ask questions later. This could curtail the ESM's powers and comes during nervous times when the impasse between the German view and that of the peripherals and the world is growing."

The euro fell briefly after the German ZEW survey, which showed economic sentiment posted its biggest monthly drop since 1998 in June in a sign that even the bloc's strongest economy was not immune from the crisis.

FED EASING EYED

The Fed's rate-setting committee starts its meeting on Tuesday and a few market players have speculated it could opt for a third round of quantitative easing as Europe's troubles pose a risk to growth in the world's largest economy.

Another round of monetary stimulus would weigh on the U.S. dollar and boost growth-linked currencies like the Australian dollar, traders said.

The dollar index which measures the greenback against a basket of major currencies was down 0.2 percent at 81.763, having struck a one-month low of 81.266 on Monday.

The dollar edged lower against the yen, easing 0.3 percent to 78.88 yen and a drop below 78.61 yen will take it to its lowest in two weeks.

The dollar's move lower came as interest rate differentials moved against it on expectations of more Fed easing. Those expectations saw the growth-related Australian dollar jump to a six-week high of $1.0147.

Against the backdrop of slowing growth the world's major economies, or G-20, were set to urge Europe to take "all necessary policy measures" to resolve its woes and U.S. President Barack Obama requested a meeting with its leaders.

FILED UNDER: