FOREX-Euro steady, investors hold fire before summit
* 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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