FOREX-Euro flat vs dollar as investors await Spain decision

Wed Oct 10, 2012 10:35am EDT

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* Dollar index holds near 1-month high

* Euro vulnerable to more falls if breaks below $1.28

* Draghi warns euro zone faces long road to recovery

By Wanfeng Zhou

NEW YORK, Oct 10 (Reuters) - The euro was little changed on Wednesday against the dollar, stabilizing after a fall in the previous day, as traders waited for direction on whether and when debt-ridden Spain would ask for a bailout.

European Union leaders are scheduled to meet at the end of next week. Euro zone finance ministers delivered a united defense of Spain at a meeting this week, saying the country did not need a bailout, at least for now.

"We are in a holding pattern," said John Doyle, currency strategist at Tempus Consulting in Washington. "What we're going to look for the rest of the day and probably next week and a half is if there's any news coming out of Spain and possible decision on a full bailout or not."

The euro was little changed at $1.2892, erasing the losses which had taken it to session low of $1.2833 on Reuters data, the weakest since Oct. 1.

A Spanish bailout deal is seen by most traders as positive for the euro because it would activate the European Central Bank's bond-buying program. The mechanism is aimed at reducing borrowing costs for debt-ridden countries, thus easing the euro zone's financial crisis.

The euro has rallied 7 percent since hitting a two-year low of $1.2040 in late July after the European Central Bank head Mario Draghi pledged to do whatever it takes to preserve the euro.

"The market had factored in that the ECB had gone to all these lengths to resurrect the bond-buying plan with Spain in mind, and Spain just hasn't taken the bait as yet," Standard Bank's head of G10 currency research Steve Barrow said.

"If Spain had made that request when the euro was strong and bond yields had already come down quite a bit, positive momentum could have pushed the euro dollar on to $1.35. The problem now is that maybe their chance has been missed, and instead perhaps Spain will now not do anything until yields start to move up."

The euro remained above chart support at its 200-day moving average of $1.2821 and the Oct. 1 low of $1.2802. A break below there would leave it vulnerable to more falls.

"The big question is whether euro/dollar can break below $1.28, which could support momentum to the downside. But this will be difficult unless we get very negative equity markets," said Niels Christensen, currency strategist at Nordea in Copenhagen.

Unease over Spain's future, which has pushed investors back to less risky debt despite the low yields on offer, was reflected in strong demand in a 3.1 billion euro sale of five-year German bonds, which are seen as a safe haven investment, on Wednesday.

Draghi said the region faced a long road to recovery, despite the ECB's plan to buy the bonds of indebted euro zone countries, and that there was no alternative to budget austerity.

Investors are also fretting about whether Greece will agree terms with its international lenders for the next tranche of funds needed to keep the country afloat.

German newspapers attacked "ungrateful" Greeks for the hostile public reception they gave Angela Merkel in Athens and some criticised the Chancellor's generosity for promising they would stay in the euro zone.

Merkel reaffirmed her commitment to keeping Greece in the euro, but offered Prime Minister Antonis Samaras no concrete relief ahead of a report next month by the "troika" of international creditors on Greece's progress on savings targets.

The dollar index was up 0.1 percent at 80.010, having earlier hit 80.186, its strongest since Sept. 11.

The Australian dollar meanwhile rose after a successful sale of Australian long-dated bonds boosted demand. It was last up 0.3 percent against the U.S. dollar at $1.0232.

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