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FOREX-Euro holds near 6-week high vs dollar before summit
October 25, 2011 / 10:31 AM / 6 years ago

FOREX-Euro holds near 6-week high vs dollar before summit

* Euro holds near previous day’s 6-week high of $1.3957

* May rise but vulnerable to disappointment from EU summit

* Resistance at 200-week moving average just ahead of $1.40

* Japan keeps up rhetoric on yen strength

By Jessica Mortimer

LONDON, Oct 25 (Reuters) - The euro held firm against the dollar on Tuesday, close to a six-week high, supported by expectations European leaders would deliver a convincing plan to contain the region’s debt crisis at a summit on Wednesday.

The euro was steady at $1.3921 , off Monday’s six-week high of $1.3957. However, analysts said investors would need to see a positive outcome from the second summit in four days for the euro to break above $1.40, while its current strength left it vulnerable to a sell-off in the event of any disappointment.

“It will be difficult for the euro to break above $1.40 ahead of the meeting. People are happy to sit on their positions awaiting any outcome,” said Niels Christensen, currency strategist at Nordea in Copenhagen.

“The indications are that there is a will to solve the problem, which is maybe not a huge leap but it’s a step ahead not backwards.”

Uncertainty remained about whether the plan would prevent contagion to larger countries, and over the extent of the losses private holders would take on Greek debt.

Analysts said the euro could top $1.40 after the summit as investors took profit on their short euro positions, but it could drop sharply again if short-covering dwindled and euro zone debt worries increased.

“The fact that these short positions are still there suggests there is certainly a risk of the euro going above $1.40, but it is questionable whether it would sustain those gains,” said Jane Foley, Rabobank senior currency strategist.

“It would be foolhardy to dismiss the possibility of an attempt at the downside.”

Commodity Futures Trading Commission data last week showed speculators still had a large net short euro position.

The euro faced resistance near $1.3988, its 200-week moving average, and around $1.4040, a 50 percent retracement of its May to October decline. Traders also cited talk of an options barrier at $1.40 being defended.

European leaders neared a deal over the weekend on bank recapitalisation, and euro zone officials said France and Germany were close to agreement on how to leverage a euro zone rescue fund to stop bond market contagion.

But the difficulties of reaching a political consensus were highlighted as German lawmakers secured a full parliamentary vote on crisis measures negotiated by Chancellor Angela Merkel, a move which risked delaying Europe’s response.

Analysts were also concerned the euro zone’s debt problems could worsen if growth slows sharply, particularly after weak purchasing managers’ surveys on Monday highlighted a risk that the region may be slipping into recession.

DOLLAR/YEN

The yen hovered just shy of a record high against the dollar, leaving investors nervous about possible intervention by the Japanese authorities to stem the currency’s rise.

Japanese Finance Minister Jun Azumi again warned markets against pushing up the yen too far, saying he was ready to take firm steps if its gains became excessive.

The dollar was steady at 76.14 yen , near a record low of 75.78 yen hit late last week on EBS trading platform.

The dollar index, which measures the greenback’s value against a basket of currencies, stood at 76.080 , near a six-week low of 75.985 hit this week.

The chance of more monetary stimulus from the U.S. Federal Reserve has weighed on the dollar recently as some policymakers have stressed the need to boost a weak economy.

One factor that has supported the yen this year is a narrowing of yield spreads between Japanese debt and their U.S. and European counterparts, which has made overseas bond investment less attractive to Japanese investors.

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