FOREX-Euro steady, investors hold fire before summit

Wed Jun 27, 2012 6:59am EDT

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* Euro flat vs dollar, strong support around $1.2440
    * Little progress on debt crisis expected at EU summit
    * Italian short term costs rise

    By Nia Williams
    LONDON, June 27 (Reuters) - The euro steadied against the
dollar on Wednesday after hitting a two-week low the previous
day, but looked vulnerable to losses ahead of a European Union
summit that is not expected to deliver new measures to ease the
region's debt crisis.  
    Any move toward the issuance of common euro zone bonds
appeared less likely than ever after German Chancellor Angela
Merkel was quoted as saying Europe would not share total debt
liability "as long as I live". 
    German leaders have deflated expectations of any
breakthrough from the two-day summit which starts on Thursday,
but investors are reluctant to sell the euro aggressively in
case any progress in tackling the debt crisis is made. Another
factor checking the euro's losses is the fact that speculators
already have large bearish bets against the common currency. 
    "People are waiting for the inevitable - which is that
policymakers will probably fail to do what is necessary," said
Neil Mellor, currency analyst at Bank of New York Mellon.
    "There's still the tantalising possibility there may be some
give and take at the summit, so there's a degree of giving the
euro the benefit of the doubt. But the long-term downtrend is
distinctly negative."
    The euro was flat at $1.2495, recovering from a fall
to a two-week low of $1.2441 hit on Tuesday on trading platform
EBS, a level seen as providing strong technical support. The
next downside target is a two-year low of $1.2288 hit on June 1.
    Some traders said a roadmap towards a common banking union
or a decision at the summit to activate the euro zone's rescue
fund to start buying Italian and Spanish government debt and
lower their borrowing costs could provide relief to the euro.
    Italy's six-month borrowing costs rose to 2.957 percent at
auction on Wednesday, their highest since December. The spike
comes just ahead of a five- and 10-year debt sale for up to 5.5
billion euros on Thursday. On Tuesday, Spain saw its short term
borrowing costs nearly triple.
    Growing concerns that more peripheral euro zone nations will
be shut out from capital markets and expectations that fiscal
austerity will drag the region into a more painful recession
will see the euro stay under pressure. Any bounce towards the
$1.27 or $1.28 level would attract sellers, traders said.
    "I am going short euro/dollar into the summit," said Stuart
Frost, head of absolute returns and currency at RWC Capital, a
London based fund manager. "The euro should be a lot lower than
what it is and even if there is an agreement, chances of which
are very low, the currency is headed towards $1.20."
    A Nomura survey showed a majority of investors expect the
summit to produce no concrete measures. Twenty-two percent
expected "a bailout announcement of sorts" while 14 percent were
looking for "a resolution towards banking union", reflecting an
outside chance of a breakthrough. 
    
    JAPANESE POLITICS
    Against the yen, the euro was flat at 99.334 yen,
having hit a two-week low of 98.74 the previous day. The common
currency has lost more than 1.6 percent against the yen so far
this week.
    The dollar was also flat at 79.47 yen, well below a
two-month high of 80.63 yen hit earlier this week.
    Some market players said that while the yen was being
supported by safe-haven inflows, political uncertainty stemming
from a rift inside Japan's ruling party could start to weigh.
Many investors outside Japan, though, are still unsure of the
implications for the yen from the political uncertainty.
    "International investors have been burned so many times by
trying to trade dollar/yen around Japanese political events.
They are happy to watch the story unfold but unwilling to take
positions, in FX at least," said Gareth Berry, associate
director of G10 FX strategy for UBS in Singapore.
    Prime Minister Yoshihiko Noda faces the risk of a split in
his party that could trigger a snap election after his signature
tax increase plan cleared parliament's lower house on Tuesday
despite its rejection by a group of party rebels.
 
    The hike is aimed at curbing Japan's snowballing public
debt, which already exceeds two years' worth of its economic
output. Analysts at Morgan Stanley believe the move to raise
taxes will give the Bank of Japan more leeway to ease monetary
policy and that is likely to be negative for the yen.
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