May 20, 2011 / 9:56 AM / 6 years ago

FOREX-Euro supported above recent lows, dollar weaker

* Euro EUR= steady, clings to Thursday's gains

* Digital option expiry at $1.4360 to influence trade

* Dollar/yen bids seen near Y81.30, offers above Y81.80

(Updates, adds details, quote)

By Anirban Nag

LONDON, May 20 (Reuters) - The euro was steady against the dollar on Friday, holding on to modest gains made in the previous session, with investors' focus slowly shifting to interest rate differentials from the euro zone's debt crisis.

Trading in the euro was influenced by a large $1.4360 digital option for expiry on Monday, with the spot euro/dollar EUR= pair needing to hold below that level for a payout.

The euro was flat at $1.4310, EUR=, well above a seven-week low of $1.4048 struck on trading platform EBS earlier this week. It was hovering above its 55-day moving average, currently at $1.4301, although traders said players could square their positions before close, mindful of a possible event risk from Spanish local elections at the weekend. [ID:nLDE74F1GL]

The euro was supported by the dollar's own struggles, with the greenback taking a hit on Thursday from data showing a slowdown in manufacturing growth in the U.S. Mid-Atlantic region and an unexpected fall in existing home sales in April.

The data backed views that the Federal Reserve will likely keep monetary policy easy in the coming months, in sharp contrast to the tightening cycle the European Central Bank has already embarked on.

Despite favourable rate differentials, the euro has shed around 4 percent since hitting a peak near $1.4940 in early May, hurt by concerns about a possible debt restructuring in Greece and as a selloff in commodities such as silver XAG= and oil LCOc1 led investors to unwind dollar-funded bets.

"In our view the Greek situation is being overplayed by the market and we think that the politicians, the European Central Bank and the International Monetary Fund will get around to finding a solution," said Gavin Friend, currency analyst at nabCapital.

"The euro has good support and although there is talk of options at $1.4360, I think it can test resistance at $1.4425 in the near term." The euro last traded near that level on May 11.

With data showing German producer prices rising strongly in April, expectations of further tightening measures by the ECB seem to have overshadowed the split emerging between the ECB and euro zone politicians about how to tackle Greece's debt crisis. [ID:nLDE74J08I] [ID:nLDE74I13Q].

PERIPHERAL DEBT PROBLEMS LOOM

Still, euro zone peripheral debt were under pressure with the premium investors demand to hold Spanish government bonds rather than benchmark German Bunds rising, following a lacklustre bond auction the previous day. [EUR/GVD]

Spain's Socialist government, faces major losses to the centre-right opposition Popular Party and analysts are wary that there could be the potential for unearthing of unknown financial problems. [ID:nLDE74F1GL]

The euro gave up gains against the yen, to trade 0.1 pecent down on the day at 116.66 yen EURJPY=R, although it has managed to stay above its two-month low near 113.40 yen.

The dollar was flat against the yen, at 81.52 yen JPY=, with talk of dollar bids from Japanese retail traders near 81.30 yen, while some offers from such household investors were said to be lurking at 81.80 yen and above.

Overall, the dollar was on the back foot, with the dollar index .DXY flat at 75.09, well below its recent peak of 76.00 struck earlier this week.

"Our preference is that the dollar index slowly sinks to 74.40, or a 1 percent drop from current levels, but technical buying will no doubt emerge there," said Chris Turner, head of FX strategy at ING.

The Bank of Japan kept monetary policy unchanged, holding interest rates steady in a range of zero to 0.1 percent on Friday, as widely expected.

But in surprise move, Deputy Governor Kiyohiko Nishimura dropped a proposal to loosen policy further with an expansion of the central bank's asset-buying scheme. He made such a proposal last month but was voted down by an 8-to-1 margin.

The yen showed little reaction to the BOJ decision, with some analysts saying that the possibility of the bank expanding asset buying in coming months could not be ruled out. [ID:nL4E7GK04E]

"If the recovery is delayed or slows we could see more action from the BOJ, but at this point it is difficult to judge," said Lee Hardman, currency economist at Bank of Tokyo Mitsubishi-UFJ.

Editing by John Stonestreet/Toby Chopra

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