* Euro hurt by uncertainty over aid package for Greece
* Risks of contagion could see euro slip further
* Sterling gets a lift from BOE Inflation Report
(Adds details, sterling reaction, updates prices)
By Anirban Nag
LONDON, May 11 The euro consolidated on
Wednesday, but risks were to the downside on mounting
uncertainty over whether euro zone officials would provide
timely financial aid to debt-laden Greece and Portugal.
Stabilising commodity prices provided support to
growth-linked currencies like the Australian dollar AUD=D4.
Traders said some investors were increasingly expressing a
bearish view on the common currency by adding to bullish bets on
the Australian dollar against the euro EURAUD=R.
For column please click on [ID:nLDE7490D5].
Sterling GBP=D4 gained to a session high of $1.6489 after
the Bank of England raised its medium-term inflation forecasts
in its Quarterly Inflation Report. That drove investors to fully
price in the chance of a quarter percentage rate hike in
December, compared to January before the report was released
Sterling also rose to a session high versus the euro.
The euro traded at $1.4390 EUR=, marginally lower on the
day, but above a three-week low of $1.4254 hit on Monday. Asian
central banks bought the euro at dips but traders cited
decent-sized offers at $1.4420-25 with layers of stops from
hedge funds above that area. Some expect the common currency to
face resistance around $1.4441 -- this week's high.
"Euro/dollar is being dominated by concerns about Greece and
Portugal and the contagion concerns that triggered a selloff
last week could see the common currency fall further," said Adam
Myers, senior forex strategist at Credit Agricole.
"If this trend continues, it can test lows of $1.4250 and
then $1.4160." The euro had hit a low of $1.41560 on April 18.
The euro was also weighed down by comments from a German
deputy finance minister who said that euro zone officials will
debate Greece's debt crisis next week but no decision will be
taken. He added the sovereign debt crisis in some European
countries was not a crisis of the euro. [ID:WEA0239]
Some traders said uncertainty over whether Greek debt would
be restructured or not would drive nervous investors to unwind
bullish bets in the single currency further.
Speculators' net long positions hit the highest since July
2007 in the week to May 3. But a wave of selling in the euro has
gathered pace since last Thursday, toppling the currency from a
17-month peak of $1.4940.
The euro had got a brief boost on Tuesday after a Dow Jones
news agency report, citing a senior Greek government official,
as saying Athens expects to receive a new aid package totalling
nearly 60 billion euros ($87 billion) in June. [ID:nLDE7490UN]
Although Greece denied the report, some market players
expect additional funding sooner or later given fears that other
options -- such as debt restructuring or even an exit from the
euro zone by Greece -- would be more painful and cause more
losses among European banks.
Greece is not the only source of worry for investors, with
Finland delaying a parliamentary vote on the EU's Portugal
bailout plan to Friday from Wednesday because the country's
second-largest party remained undecided.
The Finnish parliament's approval is important because it,
unlike others in the euro zone, has the right to vote on EU
requests for bailout funds. The leader of Finland's
third-biggest party reiterated his opposition to Portugal aid.
But traders are also weighing the euro zone's troubles with
another big theme that has driven the market this year -- dollar
weakness stemming from the Federal Reserve's reluctance to raise
interest rates from near zero.
In contrast, the European Central Bank has raised rates in
April and is expected to raise them further.
The dollar index .DXY stood at 74.48, down 0.2 percent on
the day, but well above a three-year low of 72.696.
"It looks too early to call this a major reversal in the
dollar," said Chris Turner head of fx strategy at ING. "Our view
has been that with little to emerge in fresh policy from the Fed
ahead of its June 22 meeting, the dollar-funded carry trade
would be a dominant theme for the second quarter."
The greenback was flat against the yen at 80.81 yen JPY=,
off a seven-week low of 79.57 yen last Thursday.
The Aussie stood at $1.0875 AUD=D4, up 0.3 percent on the
day, weathering disappointment from the Chinese data. Chinese
industrial production and retail sales fell short of market
expectations and weighed on riskier currencies but they quickly
pared losses as China shares recovered.
(Editing by Stephen Nisbet)