May 18, 2012 / 6:05 PM / 5 years ago

FOREX-Euro comes off 4-month low but worries remain

* Euro rises off four-month low vs dollar
    * Greek politics, Spain bank problems still weigh

    By Wanfeng Zhou	
    NEW YORK, May 18 (Reuters) - The euro rose from a four-month
low against the dollar on Friday as investors pared bets against
the single currency after a 4 percent drop this month but
concerns about Greece and Spain were likely to keep it under
    Technical support also helped, traders said, as the euro
approached its January low of $1.2623. A break beneath that
would opened the door to a slide toward the 2010 lows around
    Despite Friday's gains, investors preferred the relative
safety of the U.S. dollar and the Japanese yen as worries about
Europe persisted after Moody's cut the credit ratings of 16
Spanish banks on Thursday.  	
    Some traders had earlier said the euro's recent decline
could slow, given investors may be wary of holding positions
over the weekend when leaders of the G8 major industrial
economies meet.	
    No economic policy decisions are expected from the G8 but
officials said U.S. President Barack Obama hoped to promote
discussion on steps to resolve the euro zone
    "Even as position squaring dominates ahead of this weekend's
summit of G8 leaders, strong undercurrents of risk aversion
persist, as a result of which the U.S. dollar remains net bought
on balance," said Samarjit Shankar, managing director of global
FX strategy at BNY Mellon in Boston.	
    The euro tumbled to $1.2640, not far from its trough
of 2012, before recovering to trade 0.3 percent higher at
    The euro was on track for its third straight week of losses,
based on Reuters data. The 14-day exponential relative strength
index posted at 15.526, leaving the euro in oversold territory
since May 7. 	
    The euro fell to 100.17 yen, its lowest since
early February, before paring the loss to trade at 100.67,
little changed on the day.	
    Strong demand for the greenback helped the dollar index
 to a four-month high early in the global session but
those gains evaporated.  	
    "The U.S. dollar is struggling to hold its ground ahead of
the G8 Summit as hopes surrounding the meeting prop up market
sentiment, but the rise in risk-taking behavior is likely to be
short-lived as we don't expect to see any major developments
over the weekend," said David Song, currency analyst at DailyFX.	
    "Although the U.S. dollar remains overbought, the
headline-driven market continues to increase the appeal of the
greenback as the turmoil in Europe intensifies."  	
    "If it's not Greece, it's Spain that we talk about to sell
the euro. People are looking for bad news and they are concerned
there appears to be no solution," said Lutz Karpowitz, currency
analyst at Commerzbank in London.	
    Greece faces fresh elections on June 17, with many investors
increasingly concerned a victory for anti-bailout parties could
lead to Greece exiting the euro zone.	
    A recent poll showed Greece's conservatives have overtaken
the anti-bailout leftist SYRIZA in popularity, although the
volatile political mood meant most analysts saw the outcome of
the elections as a significant risk. 	
    Worries about Spain's banks and prospects of more state
bailouts for lenders kept the country's borrowing costs high.	
    Talk of a ban on naked short-selling of Spanish banking
stocks lifted Europe's bank shares. This brought some
relief for the euro, but the common currency's medium-term
prospects remained bearish.	
    Reflecting that, one-month euro/dollar implied volatility
 climbed to around 11.55 percent while three-month risk
reversals - a measure of relative demand for bets on the euro
rising or falling - were at -3.5 vols on trading platform GFI in
favor of more euro weakness.	
    The dollar was down 0.3 percent against the yen at
79.10 yen after going to a three-month low of 79.01, according
to Reuters data. Traders cited stop-loss orders below 79.00 yen
and 78.80 yen, while offers were likely to cap dollar gains
around 79.50.

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