FOREX-Euro rallies as speculation rises Spain may seek help

Tue Oct 16, 2012 4:12pm EDT

Related Topics

* Spain bailout request eyed but uncertainty remains

* Yen undermined by BOJ easing speculation, Softbank deal

NEW YORK Oct 16 (Reuters) - The euro rallied to a one-week high against the dollar and four-week peaks against the yen and sterling on Tuesday a s a me dia report indicatin g Ge rmany was open to a precautionary line of credit for Spain al layed fears about the region's debt crisis.

The euro had already firmed, helped by persistent talk Spain may soon ask for a bailout and tentative signs of improving confidence in the German economy, but the currency jumped when Bloomberg News reported that two German lawmakers said Germany is "open to Spain seeking a precautionary credit line from Europe's rescue fund."

Some of those gains were pared when Norbert Barthle, budget spokesman for Chancellor Angela Merkel's centre-right Christian Democrats (CDU), said that the Bloomberg report had "overinterpreted" comments he made on the issue and that he had not been referring to Spain.

But other factors were enough to keep the euro in positive territory and closer to session highs than lows.

A German ZEW survey showing analyst and investor sentiment rose for the second month in a row in October was also positive for the euro even as it remained in negative territory.

Adding to positive sentiment, Prime Minister Antonis Samaras said on Monday Greece will conclude talks to continue receiving the bailout funds it needs but officials said the talks would most likely not be finished by Thursday's EU summit.

"It's a risk-on market with good news out of Europe," said Marc Principato, director of SMB Forex Trading And Education in New York. "The larger technical structure has been implying strength since the 1.2800 area low and the euro/dollar is consolidating recent gains."

The euro was last up 0. 8 percent on the day at $1.304 8, with the peak at $1.3060, its highest level in a week. A break above $1.3072 would target the mid-September high of $1.31729.

Some $5.669 billion in euros changed hands using Reuters Dealing.

The euro rose as high as 103.07 yen and touched 81.02 pence against the pound.

A Spanish aid request would prompt the European Central Bank to start buying Spanish bonds to bring down its borrowing costs. Analysts and traders say this would buoy the euro, though uncertainty remains over when Spain will make a move.

Although hopes that Spain could ask for financial aid at a European Union summit this week have waxed and waned, euro zone officials have always said it may do so next month. The request would probably be dealt with alongside a revised loan program for Greece and a bailout for Cyprus.

Greece's labor minister and international lenders briefly suspended talks on austerity cuts on Tuesday to confer with their leaders on the thorny issue of labor reforms, which raised objections among government coalition partners, but the reaction was muted. {ID:nL5E8LGSQE]

"I am still bullish on euro/dollar; the next stage will be Spain to ask for the bailout and that will boost the euro," said Daragh Maher, currency strategist at HSBC In London. He forecast the euro to rise to $1.35 by year-end.

The dollar also fell to a four-week low against the Swiss franc.

YEN WEAKENS

"There seems to be pressure piling on the Bank of Japan to take action later this month. People are expecting more stimulus from the BOJ," said Katsunori Kitakura, associate general manager of market making at Sumitomo Mitsui Trust Bank in Tokyo, referring to the bank's policy meeting on Oct. 30.

Japanese mobile operator Softbank's $20 billion purchase of U.S. third-largest wireless company Sprint Nextel, the largest foreign acquisition ever by a Japanese firm, has also encouraged dollar buying against the yen.

But the yen could be resilient if worries over global growth strengthen. The Japanese currency tends to rise in times of economic stress due to Japan's net creditor status.

There was no reaction to a Kyodo News report that Japanese Prime Minister Yoshihiko Noda plans a new round of economic stimulus by the end of next month as the country has entered a lull, quoting sources close to Noda.

"It is not clear that is what he is speaking about," said Daniel Katzive, currency strategist at Credit Suisse in New York. "Think that is why you don't have much reaction because the market doesn't see the government is likely to be coming out with a really massive counter measure to yen strength."

Speculation of more easing from the Bank of Japan weighed on the Japanese currency. The dollar rose to 78.96 yen, its highest since Sept. 19. It was last at 78.84 y en, up 0.3 percent, a ccording to Reuters data.

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