FOREX-Euro recovers vs dollar as Nowotny reassures markets

Wed Jan 16, 2013 7:38am EST

Related Topics

* ECB's Nowotny reassures market after Juncker comments

* Euro turns positive vs dollar, pares losses vs yen

* Dollar/yen under pressure from profit-taking

By Nia Williams

LONDON, Jan 16 (Reuters) - The euro regained ground against the dollar on Wednesday after a European Central Bank policymaker soothed investor concerns that officials might take steps to undermine the currency's recent strength.

ECB member Ewald Nowotny said the exchange rate was "not a matter of major concern", contrasting with comments from Eurogroup head Jean-Claude Juncker who on Tuesday prompted investors to sell the euro by saying it was "dangerously high".

Nowotny's comments helped to the euro turn positive against the dollar to hit a session high of $1.3325, within sight of an 11-month high of $1.3404 reached on Monday.

The euro also pared losses against the yen to trade down 0.7 percent on the day 117.34, coming off an earlier low of 116.47 yen.

The euro has rallied broadly since last week after ECB President Mario Draghi painted a more positive outlook for the euro zone economy, although strategists said some investors were looking to take a quick profit on those gains.

"The Nowotny comments have reassured the market. We have had a lot of people who have shifted their positions from euro shorts to euro longs and these investors are quite nervous, especially the latecomers to the trend," said Ulrich Leuchtmann, head of FX strategy at Commerzbank.

Traders cited stop loss sell orders below $1.3250 and bids from sovereign investors below that level.

Some analysts said the euro could struggle to push beyond Monday's high given the poor growth outlook for the region. Leuchtmann forecast the euro to trade around $1.30 in three months time.

"Of course, the euro has momentum, but there are risks of slippage in the euro zone given the outlook for growth is weak and there is always a chance Italy and Spain can miss their deficit targets, "said Neil Mellor, currency strategist, at Bank of New York Mellon.

The yen rose for a second day as investors pared large bets against it. The euro had climbed to 120.13 yen this week, its highest in 20 months, after the European Central Bank last week dashed expectations of a near-term rate cut and as Japanese officials ramped up pressure on the Bank of Japan to ease monetary policy aggressively and weaken the yen.

A rising currency hurts exports and major central banks, including the Federal Reserve, the Bank of England and the Bank of Japan, have been printing money in an attempt to keep the value of their currencies lower by increasing supply.

YEN REBOUND

The dollar pared losses from a session low of 87.79 yen but remained subdued to last trade down 0.65 percent on the day at 88.21 yen. Traders cited supporting bids at 87.70/80 yen.

The latest rebound in the yen came after Japan's Economics Minister Akira Amari cautioned on Tuesday that excessive yen weakness could boost import prices, hurting people's livelihood.

Many traders called it a healthy correction, given the yen has lost substantial ground since October and hit a 2-1/2 year low of 89.67 on Monday.

Investors have put on big bets against the currency with the new government in Tokyo very vocal about pressing the BOJ to tackle deflation, calling for a 2 percent inflation target.

The BOJ is widely expected to agree such a target at its policy meeting on Jan 21-22, although some traders said there could be buy-on-rumour-sell-on-fact selling in dollar/yen afterwards.

"I haven't come across anyone who seriously thinks that the BOJ can boost inflation to 2 percent," said Takako Masai, head of forex at Shinsei Bank, adding that the BOJ meeting could offer a good chance to exit bearish bets on the yen.

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