October 17, 2012 / 10:57 AM / in 5 years

FOREX-Euro hits 1-month high as dollar struggles

4 Min Read

* Euro helped by Moody's reaffirming Spanish rating

* Investors anticipating Spanish aid request

* Low expectations for EU summit later in week

By Nia Williams

LONDON, Oct 17 (Reuters) - The euro hit a one-month high against a weak dollar on Wednesday, lifted by Moody's rating agency affirming Spain's investment grade rating and growing speculation Madrid will ask for a bailout next month.

Moody's rating, which is contingent on Spain implementing fiscal reforms and the European Central Bank stepping in to buy peripheral bonds, soothed immediate concerns about a downgrade to junk status. That pushed Spanish yields lower before an auction on Thursday and helped the euro.

The euro was up 0.6 percent on the day at $1.3130, its highest since mid-September. Strong resistance was seen at $1.31729, the four-month high set on Sept. 17, with stop-loss buy orders cited above $1.3180 and reported option barriers at $1.3200.

Traders cited strong bids from sovereign investors at $1.3080 but most market players were cautious about driving it above $1.3200 without a definite aid request from Madrid.

The euro has been supported in recent weeks by bets that Spain will eventually request a bailout, a move that would open the way for the European Central Bank to buy Spanish debt and help lower borrowing costs. Talk that a line of credit could be extended to Spain has also boosted the euro.

"It's supportive that Spain avoided a downgrade but the bigger driver is more expectations that Spain will soon require some form of financial support from Europe," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.

The timing of such an aid request, however, remains unclear.

Hardman said the euro could squeeze as high as $1.35 after a Spanish bailout request but may falter there if concerns resurface that euro zone policymakers are being complacent in tackling the long-running sovereign debt crisis.

Expectations of progress in addressing Greece's problems at a European Union summit on Thursday and Friday were low. A German official, speaking on condition of anonymity, said he did not expect any substantial discussion of Greece at the summit, adding that he also did not foresee an interim report from international lenders on the Greek economy.

Dollar Index Falls

A possible line of credit to Spain and the some easing of German opposition for aid to peripheral countries were likely to support to the euro in the near term, but gains into $1.35 would be tough to sustain.

"The possibility of Spain being extended a precautionary credit line is good as it has reduced further any uncertainty about Spanish sovereign financing, at least for the shorter term," said Peter Kinsella, senior currency strategist at Commerzbank.

"The question really is where it runs out of steam. Anything up to $1.3250-$1.3300 is stretching it. We are at the upper end of a range trading environment."

The euro also touched a one-month high of 103.51 yen , before trimming gains to trade up 0.2 percent at 103.29 yen.

The yen has been held back recently by speculation about the potential for further monetary easing by the Bank of Japan, which holds its next policy meeting on Oct. 30.

Market talk about the potential for dollar-buying flows related to Japanese mobile operator Softbank Corp's $20 billion deal to buy U.S. wireless carrier Sprint Nextel Corp , has also weighed on the yen in recent sessions.

The dollar dipped 0.2 percent to 78.70 yen, retreating from Tuesday's one-month high of 78.97 yen.

It fell to its lowest level in a month against a basket of currencies, at 79.043 and hovered near a five-month low against the Swiss franc of 0.92155 francs.

Some investors were wary of buying the dollar after Federal Reserve Chairman Ben Bernanke defended the central bank's latest round of monetary easing in a speech on Sunday. The policy, known as QE3, floods the market with U.S. currency and tends to weaken the dollar against other units.

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