FOREX-Euro rebounds from 2-yr low as risk rally gains ground

* China's GDP meets expectations, eases global growth fears
* Moody's cuts Italy rating, but debt sale fares well
* U.S. inflation data shows unexpected rise

By Gertrude Chavez-Dreyfuss
NEW YORK, July 13 (Reuters) - The euro rallied from a
two-year low against the dollar on Friday, bolstered by a
rebound in equities and commodities after China economic data
came in less dire than feared, although the currency's outlook
remained bleak due to the region's persistent debt uncertainty.
The euro zone's single currency survived a surprise cut in
Italy's credit ratings by Moody's, which highlighted the risk
that the debt crisis could potentially engulf the bloc's
third-largest economy.
But sentiment was buoyed by data showing China's economy
grew 7.6 percent in the second quarter, the weakest pace in more
than three years, but still better than some outlooks.

"The euro finally caught up with the risk rally that
prompted short-covering given that it had been sold off sharply
in recent sessions," said Joe Manimbo, senior market analyst at
Western Union Business Solutions in Washington.
"But going forward, investors still have a fairly skeptical
outlook for the euro and its overall bearish tone leaves it
vulnerable to a sell on rallies," he said.
The euro last traded at $1.2238 per U.S. dollar, up
0.3 percent, the currency's best one-day rise so far in two
weeks.
It earlier fell as low as $1.2160, its weakest level since
mid-2010. The slide in the euro came in the wake of the Moody's
Investors Service downgrade of Italy's sovereign debt rating to
Baa2, citing doubts over the country's long-term resolve to push
through much-needed reforms.
On the week, the euro was down 0.2 percent and off more than
5 percent so far this year - far exceeding 2011's annual loss of
3.2 percent. Declines accelerated after last week's deposit and
refinancing rate cuts by the European Central Bank.
"For the most part, it's Friday, the market is thin and
everybody is short," said Ronald Simpson, managing director of
global currency analysis at Action Economics in Tampa, Florida.
"Euro/dollar has made new daily lows nine days in a row
now," he said. "I think it's just a bit of a short-squeeze,
driven by various rumors and talk."
Despite the euro's gains on Friday, analysts at
ActionForex.com said there is no sign of a bottom yet. Intraday
bias remains on the downside, they said, for a test of minor
support at $1.2132. A break of that will target $1.1875, the low
hit in early June 2010.
On the upside, a break of minor resistance at $1.2333 is
needed to signal short-term bottoming, ActionForex said.
Otherwise, the outlook remains bearish.
With the euro's gains, implied volatility, a measure of a
currency's price movements in either direction, dropped to below
10 percent, its lowest in more than a week, suggesting
less anxiety in the near term.
The euro also rose against the Japanese yen, trading 0.2
percent higher at 96.90 yen, but down 0.8 percent this
week.

While Moody's warned it could further downgrade Italy's
credit rating, now just two notches above junk status, if the
country's access to debt markets were to dry up, Italy managed
to pass a tough market test as three-year borrowing costs fell
well below 5 percent.
Investors also mostly shrugged off data in the United States
that showed consumer sentiment cooling in early July to the
lowest level in seven months.
Separately, U.S. producer prices rose only slightly last
month as energy costs dropped, suggesting inflation pressures
remain muted and leaving the door open for more easing by the
Federal Reserve.
Against the yen, the dollar was last down 0.1 percent at
79.18 yen.