* Euro off 7-week lows, but view remains uncertain
* Asian sovereign demand helps euro pare losses
* Merkel says she’s against debt restructuring (Updates prices, adds quote)
By Gertrude Chavez-Dreyfuss
NEW YORK, May 16 (Reuters) - The euro rebounded from seven-week lows on Monday, boosted by sovereign demand after last week’s sharp sell-off, as optimism grew a European Union meeting would support Greece and avert a restructuring of the country’s debt.
German Chancellor Angela Merkel said as much on Monday as she voiced opposition to debt restructuring by any euro zone country before 2013. Such a restructuring, she said, would be “incredibly damaging” to the euro zone’s credibility. See [ID:nBAT006249].
“I expect the European finance ministers to show solidarity and support for Greece,” said Richard Franulovich, senior currency strategist at Westpac in New York, which, he said, should put a floor on the euro for now.
The impact of the arrest of International Monetary Fund chief Dominique Strauss-Kahn on sexual assault charges, which earlier dampened sentiment on the euro, faded as central banks started snapping up the euro after it declined to the $1.4050 level.
Strauss-Kahn had been due to join the meeting of euro zone finance ministers on Monday to discuss the bloc’s debt crisis and how to handle Greece, which is struggling to meet the terms of a 110 billion-euro EU/IMF bailout granted last year. Deputy Managing Director Nemat Shafik will be at the meeting instead, the IMF said.
Overall, the market mood remained cautious.
Market players said the euro’s outlook remained uncertain as meaningful progress on resolving the Greek crisis was unlikely at Monday’s meeting. Athens is struggling to put its public finances in order under the EU/IMF bailout.
“There is clear support in the euro versus the dollar at $1.41 after having been sold off so much over the last week and a half, so there’s a lot of bargain-hunting here,” said Boris Schlossberg, director of FX research at GFT in New York.
“But I don’t know how firm the support is.”
The euro rose as high as $1.42450 EUR=EBS on trading platform EBS and was last at $1.42370, up 0.8 percent. Earlier, it fell to $1.40481, the lowest since late March.
Traders said the euro’s earlier fall was met with strong demand from Asian sovereign accounts that were still keen to buy on dips, while strong bids were seen toward $1.40.
The euro has fallen roughly 6 percent from a 17-month peak of $1.4940 hit less than two weeks ago as peripheral debt concerns resurfaced, but $1.40 seemed to be a key support level.
That level represents the euro’s 200-week moving average, while the 100-day moving average lies at $1.3922. Below that is the 50 percent retracement of the euro’s January to May rally, near $1.3900.
On the upside, key resistance resided at $1.42539, the 23.6 percent retracement of the decline from the 17-month high at $1.4940 in early May to Monday’s low.
Camilla Sutton, chief FX strategist at Scotia Capital in Toronto, said despite the slight pick-up in the single currency, the market’s bias remained at selling the euro for now as investors tried to clear out long positions.
U.S. data last Friday showed speculators still holding hefty long positions even after trimming them and other higher-yielding currencies such as the Australian dollar last week, a trend that suggests chances of more liquidation of euro long positions. [IMM/FX]
UBS flows data also indicated that leveraged names sold euro/dollar for a seventh straight week, while corporate clients sold the pair for 20 weeks in a row.
UBS currency strategist Gareth Berry said the flows action last week suggested it may be a dollar-buying story as well, as the Federal Reserve ends its quantitative easing program in June. Dollar buying by UBS clients hit a 13-week high last week.
Overall, risk sentiment seemed to have improved on Monday as the New York session got under way, with gains in higher-yielding currencies such as the Australian, Canadian and New Zealand dollars.
The greenback rose against a basket of six major currencies to a six-week high of 76.001 .DXY. earlier, but was last down 0.6 percent at 75.299. (Editing by Leslie Adler)