* Euro returns to $1.3550 support level
* Eonia rates rise above ECB refinancing rate on Friday
* Australian dollar helped by China data
By Laurence Fletcher
LONDON, Jan 20 The euro recovered slightly from
a two-month low against the dollar on Monday, helped by higher
short-term market interest rates, although speculation the
European Central Bank may step in limited its gains.
After breaking through support at $1.3550 on Friday, the
euro fell in Asian trading on Monday, touching its lowest since
Nov. 25 at $1.35080. It later recovered some ground, and was 0.1
percent higher, back at the support level of $1.3550 in
The single currency has weakened this month as year-end
factors such as euro zone banks repatriating assets fade, with
speculation the ECB will act to loosen liquidity meaning that
even a rise in overnight borrowing rates has failed to lift it.
"We think that (the) key driver of the recent euro
underperformance is growing market expectations of ECB action to
address the tightening money market conditions," said Citi
strategist Valentin Marinov.
Eonia, the euro zone overnight bank-to-bank lending
rate, rose above 0.30 percent on Friday, more than the headline
0.25 percent rate that banks pay when they borrow at the ECB's
still unrestricted lending operations.
After the central bank's January policy meeting, ECB
President Mario Draghi said an "unwarranted" rise in the
bank-to-bank lending rates that underpin euro zone borrowing
costs would be one of the triggers for another rate cut or more
One trader said the euro's rise may squeeze out some
short-sellers but that the single currency could then head lower
again, potentially entering a technical downtrend.
Bullish sentiment towards the euro has moderated, with
investors betting on a lower euro adding to their positions for
four consecutive weeks, according to a report from Scotiabank.
"The market has been focusing on broad dollar strength
against everything except the euro ... The euro was playing
catch-up," said Chris Turner, head of FX strategy at ING,
referring to the euro's overnight weakness.
Turner said he expects the euro to fall to $1.33 this week
and to $1.20 by the end of the year against a strengthening
dollar as the Federal Reserve cuts back its huge bond-buying
programme and as euro zone residents begin to invest abroad.
Investors were left looking for direction, with little
economic data due out of Europe, other than German December
producer prices that were slightly above forecast. U.S.
markets are closed on Monday for Martin Luther King day.
The dollar index was 0.1 percent lower at 81.11 and
the greenback was 0.2 percent down against the yen at 104.1 yen
after U.S. Treasury yields fell on Friday.
The Australian dollar got some relief after China's annual
economic growth in the final quarter of 2013 came in at 7.7
percent, down from 7.8 percent in the previous three months but
slightly ahead of market expectations for growth of 7.6 percent.
"It's not a particularly good number but there wasn't any
drop to levels below the 7.5 percent threshold," said Satoshi
Okagawa, senior global markets analyst for Sumitomo Mitsui
While the data might have spurred some short-covering in the
Australian dollar, the impetus is unlikely to be strong enough
to prompt traders to go long the currency, he added.
The Aussie gained 0.4 percent at $0.8812 after
earlier falling to $0.8756, its lowest level in about 3 1/2
years, in the wake of weak jobs data last week.
Traders said the 87 U.S. cent area should provide good
support, as it did in 2010, although a break could see it test
$0.8600 in a hurry.
Kathleen Brooks, research director at Forex.com, pointed to
rising inter-bank lending rates in China, a major export market
"If we see another spike in rates as we lead up to Chinese
New Year on Jan. 31, if this relationship holds, we may see
(Chinese) stocks take another dip lower, which could weigh on
the Aussie," she said.