FOREX-Euro vulnerable after weak data, Spanish auction

Wed Dec 5, 2012 8:03am EST

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* Euro dips after Spanish bond auction
    * Weak euro zone retail sales data also weighs on euro
    * Markets to focus on ECB rate decision on Thursday

    By Anooja Debnath
    LONDON, Dec 5 (Reuters) - The euro retreated from a
seven-week high against the dollar on Wednesday, knocked lower
by lacklustre demand at a Spanish bond auction and
weaker-than-expected euro zone retail sales figures.
    The single currency hit a session low of $1.3061,
down 0.2 percent on the day, and falling past reported stop loss
orders at $1.3075-80.
    It slipped from its earlier peak of $1.3127, the highest
level since Oct. 18, with technical strategists citing near-term
resistance around the October high of $1.3140.
    Market sentiment soured after Spain's 4.25 billion euro
($5.56 billion) debt sale fell short of expectations and revived
talk of an official bailout request from Europe's fourth-largest
economy. 
    Euro zone retail sales data for October also weighed on the
euro after a sharper-than-expected fall thwarted prospects of a
consumer-led recovery from recession.  
    "There was a little bit of a consolidation after the euro's
strong run up, so we are seeing a little bit of retracement
after the Spanish bond auction," said  Marcus Hettinger, global
FX strategist at Credit Suisse.
    The euro had strengthened broadly in recent days after
Greece announced better-than-expected terms for a debt buyback,
fuelling optimism the country will continue to receive
international aid and avoid default.
    Market players who had previously bet against the single
currency cut those positions as investor appetite for euro zone
assets improved, although strategists warned the euro remained
vulnerable to underlying worries about weak euro zone
growth. 
    Some strategists said the euro could also weaken if signs
that policymakers are struggling to avert the looming U.S.
"fiscal cliff" intensify, fuelling worries the global economy
could suffer and lifting demand for the highly liquid dollar.
    The fiscal cliff is a combination of tax hikes and spending
cuts due to kick in early next year that could tip the world's
biggest economy into recession.
    "At the moment, in our view the market is positioned for the
fiscal cliff to be resolved before year end," said Lee Hardman,
currency economist at Bank of Tokyo-Mitsubishi.
    "This however leaves the market vulnerable to any signs of
disappointment in the negotiations which we feel could be
temporarily positive for the dollar due to more risk-averse
trading between now and year-end."
    
    CENTRAL BANKS IN FOCUS
    Credit Suisse's Hettinger said that while he expected a
stronger euro over the next three months, a European Central
Bank meeting on Thursday and labour market data out of the U.S.
on Friday could prevent the euro from breaking above $1.32.
    The ECB is expected to keep rates on hold at its policy
meeting on Thursday but the bleak outlook for the euro zone has
kept expectations of further easing alive.  
    Meanwhile, bets that the U.S. Federal Reserve will unveil a
fresh bond purchase scheme to replace Operation Twist, a
programme that will expire this month, at its policy meeting on
Dec. 11-12 could weigh on the dollar. 
    "If the Fed were to decide to buy Treasuries in either
December or January, that will be negative for the dollar and
thus positive for the euro," Hettinger said.   
    The euro pulled back from a 7-1/2 month high of
107.96 yen hit earlier on Wednesday to last trade up 0.1 percent
at 107.33 yen, while the dollar rose 0.3 percent to 82.17 yen.
    Investors have been expecting a more dovish stance from the
Bank of Japan if the main opposition party wins a Dec. 16
election as seems likely. 
    The single currency also hit a 2-1/2 month high against the
Swiss franc, extending recent gains after Switzerland's largest
banks said they would charge for some franc deposits.
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