FOREX-Euro rallies but gains seen short-lived, Fed awaited

Wed Mar 20, 2013 12:20pm EDT

Related Topics

* Euro rebounds from four-month low against dollar
    * Cyprus seeking financial deal with Russia
    * Fed statement at 2 p.m. (1800 GMT), Bernanke half-hour
later

    By Gertrude Chavez-Dreyfuss
    NEW YORK, March 20 (Reuters) - The euro rebounded on
Wednesday from a four-month low against the dollar in the
previous session as worries about Cyprus eased, with some
investors convinced the debt-plagued country can hammer out a
deal to avert default.
    Europe's common currency, however, remained vulnerable to 
uncertainty about Cyprus' bailout and the potential risk that
bank deposits in other euro zone countries, like Spain and
Italy, could be taxed as a pre-condition for future financial
aid. That should fan broader concerns about the euro zone as a
whole. 
    Cyprus has sought Russia's help to come up with 5.8 billion
euros after its parliament rejected on Tuesday a proposed levy
on bank deposits, which would have raised that amount. That levy
on deposits was a European Union condition for Cyprus' bailout. 
    But so far, there is no deal with Russia yet.
 
    "Headline risks abound with regard to Cyprus, but investors
are focused on how it can raise the 5.8 billion euros without
the deposit tax," said Brian Dangerfield, currency strategist at
RBS Securities in Stamford, Connecticut.
    "Investors are waiting to see whether Cyprus will be able to
get some bilateral deal with  Russia, or anything related to its
natural has reserves, or selling assets."
     The euro was last up 0.6 percent at $1.2952,
recovering from Tuesday's four-month low of $1.2843 and holding
above a key chart support level at the 200-day moving average
around $1.2873.
    One trader said Tuesday's slide was prompting a
short-covering rally which could take the euro towards $1.2960.
Any rise though could be seen as an opportunity to sell the
currency.
    Some strategists also said the European Central Bank's
assurance on Tuesday that it was committed to providing
liquidity to Cypriot banks within certain limits had helped curb
euro losses.
    Marc Chandler, global head of currency strategy, at Brown
Brothers Harriman in New York, further added that contrary to
fears over the weekend, there has not been a run of depositors
from banks in the euro zone.
    "The sovereign bond markets in the periphery had sold off
earlier in the week, but have stabilized. This is true even for
Greece, which before today had seen its 10-year bond sell off
for seven consecutive sessions, with yields rising about 125
basis points," Chandler said.
    Meanwhile, a Federal Reserve policy decision later on
Wednesday could put the euro back under pressure by highlighting
the discrepancy between an improving U.S. economy and the
fragile euro zone.
    Asset purchases and interest rates are expected to remain
unchanged. That will leave the market's focus on the statement
from the Federal Open Market Committee, the forecasts and Fed
Chairman Ben Bernanke's comments in light of improved economic
data since the last meeting.
    There has been recent speculation that the Fed could begin
winding down asset purchases and Bernanke could be asked about
their exit strategy at a news conference following the FOMC
statement.  
    But Kathy Lien, managing director at BK Asset Management in
New York, said the FOMC statement, Fed forecasts and Bernanke's
comments could send mixed messages, which has happened before.
    "The FOMC statement could recognize recent improvements in
economic data and contain a more optimistic tone, but economic
projections and Bernanke's comments could be more cautious,"
Lien said.
    In Japan, the market was wary of any comments from Haruhiko
Kuroda, who becomes governor of the Bank of Japan on Wednesday.
Expectations are high that the BoJ will embark on a much more
aggressive monetary policy to fight deflation. 
    The dollar was up 0.4 percent at 95.50 yen, while the
euro rose 0.9 percent to 123.70 yen.
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