FOREX-Euro slides as outlook stays downbeat on ECB, Russia worries

Mon Aug 11, 2014 3:17pm EDT

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(Updates prices, adds quote)

* Euro gives up Friday's gains

* Investors watching geopolitical developments for cues

* Norwegian inflation surprises, pushing crown almost 1 pct higher

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 11 (Reuters) - The euro fell against the dollar on Monday, giving up Friday's gains, hampered by looming monetary easing from the European Central Bank and worries about the impact of the Russia-Ukraine conflict on Germany, the euro zone's largest economy.

Germany is Russia's largest trading partner in the European Union. EU sanctions announced last month restrict the export to Russia of equipment to modernize the oil industry and prohibit the sale of machinery, electronics, and other civilian products that can be used for military or defense purposes.

Europe's common currency had climbed above $1.34 on Friday as investors covered overextended short positions but the rally proved short-lived given the euro zone's fundamental backdrop. The euro, though, did find support at $1.3350.

"We can see continued euro weakness because of the geopolitical tension on its doorstep," said Alan Robinson, global portfolio advisor at RBC Wealth Management in Seattle.

"However, geopolitical tension could dissipate quickly. And if that were to happen, we might see a relief rally in the euro. I think we have to be a little careful here, as the euro has come down fairly significantly."

In late New York trading, the euro was down 0.2 percent on the day against the dollar at $1.3383. Against the yen, the euro was flat to slightly lower at 136.75 yen.

Net euro short positioning is now at an extreme level, the largest in two years. This week, euro shorts totaled 128,747 contracts, according to data from the Commodity Futures Trading Commission released on Friday.

The dollar, meanwhile, was up 0.1 percent against a basket of currencies at 81.459. It was up 0.2 percent versus the yen at 102.18 yen.

The U.S. currency has caught a bid as Treasury yields edged higher earlier in the session. Benchmark U.S. 10-year yields have recovered from two month-lows hit last Friday and were last at 2.420 percent. Higher yields are an indication a sense of calm has returned to the market after a relatively quiet weekend in Ukraine and the Middle East.

"The greenback has now outperformed most rivals for months as improving U.S. data keep the Federal Reserve on course to raise borrowing rates next year," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

The Norwegian crown, meanwhile, soared to a seven-week high against the euro as investors trimmed expectations the central bank would cut interest rates.

The crown surged 1 percent against the euro amid high volumes after Norway reported consumer inflation unexpectedly jumped in July. It hit 8.2835 crowns per euro, its strongest since June 19, when the currency had dived after the Norges Bank hinted at a possible rate cut if the economy weakened.

The euro was last down 1.0 percent at 8.2769 crowns. (Reporting by Gertrude Chavez-Dreyfuss; Editing by James Dalgleish and Nick Zieminski)

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