FOREX-Euro recovers but susceptible to currency war rhetoric

Mon Feb 11, 2013 8:11am EST

Related Topics

* Euro rises vs dollar and crosses in choppy trade

* But euro vulnerable to "currency war" talk

* Concerns about Cyprus, Spain, Italy also weigh on euro

* Investors eye BOJ, GDP data and G20 meetings later in week

By Anooja Debnath

LONDON, Feb 11 (Reuters) - The euro rose on Monday as speculators bought it on dips, but was vulnerable to political and fiscal uncertainty in the euro zone and growing unease about its recent gains among some European leaders.

Some strategists said the euro could edge lower before a Eurogroup meeting on Monday and a G20 meeting later in the week, given tensions over whether some countries are deliberately trying to weaken their currencies to boost export competitiveness.

The Group of Seven nations are considering issuing a statement this week reaffirming their commitment to "market-determined" exchange rates in response to heating rhetoric about a currency war, two G20 officials said on Monday.

French Finance Minister Pierre Moscovici said on Monday that euro zone countries need closer cooperation on exchange rate policy and the bloc' finance ministers would discuss the issue when they meet.

Corporates were cited as main buyers of the euro on crosses such as against the yen and sterling helping the euro recover from a session low of $1.3358, earlier on Monday, which was close to a two-week low.

The euro was last trading up 0.3 percent on the day at $1.3408, with Middle East investors cited as main buyers. Morgan Stanley strategists said the euro could pull back towards $1.3260, its 50-day moving average.

Against the yen, the euro rose 1 percent to 125.39 yen, pulling away from Friday's one-week low of 123.43, but still some way off the 34-month high of 127.71 yen hit on Feb. 6.

"While the speed of the euro recovery was probably overdone, this correction down is also likely running out of steam. There are however risks with the Italian elections (and) Cyprus and we could see some pullback today with the Eurogroup meeting," said Ulrich Leuchtmann, head of FX research at Commerzbank.

Concerns about the terms of a bailout for Cyprus, which will be high on the Eurogroup's agenda, would cap the euro's gains, analysts said.

There are also growing worries about Spain's political scandal, while confidence in Italy has been shaken in the run-up to the Feb. 24-25 election.

"Nevertheless, I think these risks are not systemic and therefore only have a limited effect on the euro exchange rate," Leuchtmann said, predicting the euro to end this week slightly above $1.3500.

The euro sold off last week after European Central Bank President Mario Draghi kept alive expectations of rate cuts and said the bank would monitor the economic impact of the strengthening currency.

"The pace of the euro's gains in January made me feel uncomfortable, it was too far, too fast...if news from Cyprus, Spain and Italy is not good we could see $1.30 again," said Jane Foley, senior currency strategist at Rabobank.

The euro had gained around 5.5 percent against the dollar, since the beginning of January to its peak of $1.3711 on Feb. 1. Since then it has shed about 2.5 percent.

BANK OF JAPAN

Much of Asia was shut for the Lunar New Year holidays keeping volumes on the lower side. Traders braced for more volatility later in the week with U.S. retail sales, European growth data, the G20 meeting in Moscow and a Bank of Japan policy decision.

The BOJ is expected to keep monetary policy steady, particularly as Japanese authorities have come in for criticism from euro zone politicians for allowing the yen to weaken.

The dollar climbed 0.8 percent to 93.37 yen, having surged to a 33-month high of 94.075 yen last Wednesday. Traders reported U.S. investors selling the yen.

In the past few months, the yen has slumped as Prime Minister Shinzo Abe put intense pressure on the central bank to take aggressive easing measures to revive the economy.

The yen's weakness is likely to persist as it is widely expected the new BOJ chief, who will take over next month, is likely to be someone who is amenable to Abe's policy stance.

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