April 16, 2012 / 5:30 PM / 6 years ago

FOREX-Euro retreats on worries over euro zone

* Euro falls to 2-month low vs yen, 1-1/2 yr low sterling
    * Stops cited below $1.2970, tech support at $1.2955
    * Spanish bonds in focus, yields jump above 6 percent
    * China yuan band widening having minimal impact

    NEW YORK, April 16 (Reuters) - The euro hit a two-month low
against the yen and a 1-1/2-year trough versus sterling o n
M onday as a rise in the yield on Spain's government bonds raised
fresh concerns about the euro zone economic outlook.  	
    Spain's 10-year government bond yields rose above 6 percent
for the first time this year as investors worried about the
country's ablity to contain its budget deficit, and the cost of
insuring its debt hit a record high. 	
    Commodities-linked currencies such as the New Zealand and
Australian dollars slipped, while the yen rose to a 1-1/2-month
high against the U.S. dollar. Stronger-than-expected U.S.
retail sales for March, however, helped the dollar trim some of
its losses against the Japanese currency.	
    "Already at multimonth lows against the dollar, yen and
sterling, the euro would be vulnerable to further losses if
Madrid fails to put a halt to the steady erosion in market
confidence in its ability to manage its massive load of debt,"  
said Joe Manimbo, senior market analyst at Western Union
Business Solutions in Washington. 	
    In mid afternoon New York trading, the euro last
changed hands up 0.1 percent against the dollar at $1.3086,
after climbing as high as $1.3093. Earlier it dropped to a
two-month trough of $1.2993 and below reported options barriers
at $1.30. 	
    Traders cautioned not to read too much into the move higher
against the dollar, saying it was largely a technical rebound
after holding key support.	
    Traders cited selling by Asian investors before reported
demand from central banks helped the euro pare losses. The euro
in late morning trading pared losses on demand from corporates
at the 11 a.m. EDT fixing in London.	
    News that ratings agency Fitch is not currently considering
any action on Italy, the euro zone's third-largest economy and
one of key concern because of its debt load, also helped the
euro cut losses. Fitch said Italy's budget measures are
"credible" and consistent with a gradual reduction of its debt.
 	
    Investors will also focus on Spain's auction of two-year and
10-year bonds on Thursday after selling short-dated bills on
Tuesday. Any sign of 10-year yields heading closer to the 7
percent level that is regarded as unsustainable could prompt
further euro weakness. 	
    "We're also in the midst of a global slowdown and that's
affecting the euro," said Sebastien Galy, senior currency
strategist, at Societe Generale in New York. He added that in a
global slowdown, those affected are countries with huge fiscal
deficits because that increases the pressure for more monetary
easing.	
    Stop-loss euro sell orders were reported below $1.2970, but
near-term support was seen at $1.2955, around the 61.8 percent
retracement of the euro's climb from the January low to the
February peak. 	
    Even so, some strategists said the rapid appearance of
buyers below $1.30 meant the euro was unlikely to test the
January 2012 low this week. 	
    In the options market, demand to protect against further
euro weakness increased as one-month risk-reversals
, an indication of investors' expectations for a
currency to rise or fall, worsened from last week.
 	
    The rapid erosion in investor confidence has put the
spotlight on the ECB. Many market players expect policymakers to
revive purchases in the secondary market of bonds of southern
European countries such as Spain to stem rising yields, while
some are hoping for a fresh infusion of low-rate funding.	
     	
    SOLID U.S. RETAIL SALES	
    The dollar fell against the yen, falling to 80.31
yen, its lowest since Feb. 29. It was last at 80.43 yen, down
0.6 percent, trimming losses after the U.S. Commerce Department
reported that retail sales rose 0.8 percent in March, more than
expected, despite high gasoline prices..	
    Noting that all the components of the retail sales data "far
exceeded market expectations, Omer Esiner, chief market analyst,
at Commonwealth Foreign Exchange in Washington, said, "I think
it's a clear sign that U.S. consumer spending remains strong.	
    "On balance I think it's the latest sign that the U.S.
economy is outpacing a lot of its major counterparts," he added 	
    The euro also fell against the yen to a two-month low of
104.61 and was last at 105.18 yen, down 0.6 percent.
Against sterling, the euro fell to 82.05 pence, its
lowest level since September 2010; by midday, it was 0.2 percent
lower at 82.35 pence.	
    Commodity currencies were under pressure as well with the
Australian dollar falling for a second straight trading day and
was last at US$1.0341, while the New Zealand dollar
 was down 0.4 percent at US$0.8185. 	
    News over the weekend that China had doubled the yuan's
daily trading band against the dollar to 1 percent had limited
impact on major currencies. Some analysts said Beijing's
decision could eventually be positive for risk sentiment, as
Chinese authorities would not push ahead with such financial
reforms if they were not confident of avoiding a hard economic
landing. 	
    Overall the move was seen as unlikely to alter market
expectations of gradual yuan appreciation of around 2 to 3
percent this year. The yuan weakened on the first day of trading
after the wider band was adopted.

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