CORRECTED-FOREX-Euro off lows as hedge fund buying triggers stop losses

Tue Jul 17, 2012 3:06am EDT

Related Topics

(Corrects para 1 to dollar index at 1-week low, not 7)

* Dollar under pressure ahead of Bernanke testimony

* Hopes for more easing rise after weak US retail sales

* Euro, Aussie bounce off lows as risk appetite a bit up

By Antoni Slodkowski

TOKYO, July 17 (Reuters) - The euro rose versus the dollar on Tuesday as purchases from hedge funds triggered a flurry of stop-loss buying, pulling the greenback to a one-week low against a basket of currencies, exacerbating its losses after poor U.S. retail sales figures.

In line with a mild increase in risk appetite across Asia on hopes for more monetary stimulus from the world's largest economy, the euro and the Australian dollar bounced off recent lows and also pushed higher versus the yen.

The euro gained 0.2 percent to 96.98 yen, while the Aussie was at 81.25 yen.

"We're seeing hedge funds from Singapore coming in and scooping up the euro and the Aussie against the yen," said a senior spot trader for a major Japanese bank, adding that the move was mostly flow-driven and not tied to any particular news.

The rise against the Japanese currency helped the euro muscle in on the greenback. The common currency climbed to a one week high at $1.2314, having triggered stop-losses at 1.2300. It then settled around 1.2285.

The dollar was also stuck near one-month lows against the yen as Tokyo markets reopened after a holiday. A threat of intervention by the Tokyo authorities and weakness versus other currencies helped halt the yen's advance on the greenback.

Traders are focusing their attention on the world's largest economy ahead of the Federal Reserve's Chairman Ben Bernanke testimony before Congress on Tuesday and Wednesday.

"The sell-off in the U.S. dollar and U.S. equities tell us that investors are positioning for slightly more dovish comments from Bernanke," said Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

"However, outside of overtly signaling the possibility of more stimulus, there's not much Bernanke can say or do that he hasn't already," said Lien.

The dollar stood at 78.92 yen, barely changed from late New York levels. Its support now rests at a June 15 low of 78.61 yen, while resistance looms at its 200-day moving average at 79.05. Traders reported a large bid supporting the pair at 78.50.

The Fed last month expanded efforts to keep long-term interest rates low by announcing it would buy an additional $267 billion in long-term bonds while selling short-term securities in a measure known as Operation Twist.

The central bank, however, held off from launching a third round of outright bond purchases that would expand its balance sheet, a form of stimulus known as quantitative easing.

Analysts said that despite a nudge higher on Tuesday, the euro has become the funding currency of choice after both German and Dutch two-year bond yields turned negative recently.

The strength of Germany's economy has made its highly-liquid bonds a major safe haven from the euro zone's sovereign debt crisis and Dutch bonds have also enjoyed similar demand.

With the dollar on the defensive, the common currency reversed some of its losses sustained versus the dollar after weak U.S. retail sales, but Lien cautioned it was not the start of a strong uptrend.

"The rally in the euro had nothing to do with the outlook for the euro zone because the EUR/USD was trading in negative territory before the U.S. retail sales report," she said.

Even though the euro managed to eke out modest gains against the dollar on the back of its rise versus the yen, it was still close to a two-year low of 1.2162 hit last week.

Germany's Constitutional Court said on Monday it would not rule until Sept. 12 on whether the euro zone's bailout fund -- the European Stability Mechanism -- and planned changes to the region's budget rules are compatible with German law.[D:nB4E8HB01C]

A report suggesting a change in the European Central Bank's stance on how some bondholders could be treated under Spain's bank bailout has put pressure on the single currency.

The Aussie dollar was supported by after minutes showed that Australia's central bank saw "no need" to cut interest rates at its July meeting because a material easing had already been delivered and data showed the domestic economy had more momentum than first thought. (Additional reporting by Lisa Twaronite and Masayuki Kitano; Editing by Kim Coghill)

FILED UNDER: