July 5, 2011 / 8:37 AM / 6 years ago

FOREX-Euro off 1-mth highs on broad dollar bounce

5 Min Read

* Dollar supported by worries over China loans, talk of rate hike

* Speculation of U.S. corporate repatriation also helps greenback

* Euro off 1-mth highs, Aussie slides as RBA stance unchanged

By Neal Armstrong

LONDON, July 5 (Reuters) - The euro looked set to snap a six-day winning streak on Tuesday, as the dollar was bought back broadly on concerns over the Chinese economy and speculation that U.S. companies will repatriate dollars earned overseas.

Chinese media reports about a possible rate rise in China, as well as a Moody's report saying the scale of problem loans at local governments in China may be much bigger than previously thought, weighed on risk appetite and supported the dollar, market players said. [ID:nL3E7I507Y]

"Heightened negative sentiment over China's growth outlook following Moody's raising concerns over the Chinese banking sector has contributed to an overall pickup in risk aversion which has helped the dollar pick up a bid," said Lee Hardman, currency strategist at BTM-UFJ.

"There's also increasing speculation over a second U.S. Homeland Investment Act developing. The first HIA in 2004 provided quite a boost for the dollar," he added.

Under the initial HIA, U.S. companies earning profits overseas received a significant tax break by repatriating the money back to the U.S.

The dollar index .DXY, which tracks the greenback's performance against a basket of major currencies, bounced off one-month lows to trade at 74.493, up 0.4 percent from Monday's trough of 74.133.

However with legislation for a second HIA still in the works and escalating concerns over the U.S. fiscal situation, the dollar's gains could be capped.

"We believe that passage of legislation allowing for repatriation of foreign earnings is at very low odds at this stage," said JP Morgan in a note.

"News suggesting a diminished likelihood that the HIA act would pass, or further aggravations in the US debt ceiling discussion, are both bound to put the dollar back on the recent downtrend."

The dollar's strength weighed on the euro EUR= which fell 0.4 percent on the day to trade at $1.4478, off the day's low of $1.4460.

The common currency rallied over 2 percent last week in its best weekly performance since January. It suffered a setback on Monday after Standard & Poor's warned it would treat a rollover of privately held Greek debt now being discussed as a selective default. [ID:nL6E7I408N]

S&P's warning came after Greece secured a 12 billion euro loan to avert immediate default. However, it still needs a second aid package worth some 110 billion euros, which euro zone finance ministers said would be finalised by mid-September.

Market players said the euro could rebound for a possible retest of the June peak near $1.4700, particularly if the European Central Bank (ECB) raises rates on Thursday and signals more tightening.

Technical traders highlighted support at the top of the euro's Ichimoku cloud, coming in around $1.4454 on Tuesday.

Aussie Falls After Rba

The dollar received additional overall support from its advance against the Aussie after the Reserve Bank of Australia kept its key cash rate unchanged at 4.75 percent, citing sluggishness in the economy outside the booming mining sector.

The Aussie slipped below its 55-day moving average to as low as $1.0664 AUD=D4, its lowest since June 29, hovering around its lows in early European trade.

Against the yen, the dollar rose 0.5 percent to 81.13 JPY= but stayed stuck in its 79.80-81.30 yen range of recent weeks.

Among commodity currencies, the New Zealand dollar bounded to its highest since 1981 as bulls drove it through a big buy-stop level, before it slipped into negative territory on the U.S. currency's broad gains.

Meanwhile, the Swedish crown rose against the euro EURSEK=D4 after Sweden's central bank raised the repo rate by 25 basis points to 2 percent, as expected, and struck a hawkish bias. [ID:nSAT009312].

Additional reporting by Antoni Slodowski, editing by Anna Willard; neal.armstrong@thomsonreuters.com; Reuters Messaging:; neal.armstrong.thomsonreuters.com@reuters.net

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