LONDON (Reuters) - The euro steadied above a four-month trough on Tuesday, after Japan said it may buy about a fifth of the bonds a European rescue fund plans to sell later this month to finance its bailout scheme for Ireland.
But Finance Minister Yoshihiko Noda suggested Japan would use its euro cash holdings to buy the bonds, dampening some of the initial excitement from traders who had thought the move may involve fresh buying of the European currency.
Japan does not disclose the currency breakdown of its $1 trillion reserves but analysts think only a very small portion is in the euro and the impact of the news may not last long.
The pledge comes after China assured Spain it would invest in the indebted euro zone state’s bonds, the impact of which proved fleeting.
Given mounting unease over this week’s heavy schedule of debt issuance by southern European countries, the euro could easily resume its downward path, analysts said.
“The euro remains a sell on rallies,” said Jeremy Stretch head of currency strategy at CIBC World Markets.
“The Japanese are not going to recycle other parts of their reserves into buying euro debt. They want to keep up with the credit curve by continuing to invest in triple-A debt.”
The euro last traded at $1.2930, almost unchanged from late New York levels, having risen as high as $1.2992 following Noda’s comments. Resistance is at its 200-day moving average of $1.3072 while support is at $1.2794, the 61.8 percent retracement of a June-to-November rally.
Todd Elmer, currency strategist for Citi, said the Japanese pledge was unlikely to change sentiment toward the euro.
“Despite the fact that we’re seeing this groundswell of international support, it doesn’t really change or address the underlying problem and that’s not going to change until the European authorities themselves come up with a more comprehensive solution.”
FOCUS ON PORTUGAL
The focus this week is on a Wednesday debt auction that will signal whether Portugal will be able to afford continuing to raise funds in the debt market or be forced to turn to the EU and IMF for financial aid.
Markets have already pushed the 10-year Portuguese yield to a punishingly high 7.1 percent, compared with 2.9 percent for safe-haven Germany. The 7 percent mark has been recently described by Portuguese officials as a threshold of sorts above which government funding is difficult to sustain.
Finance Minister Fernando Teixeira dos Santos said on Tuesday Portugal has no plans to seek a bailout, and the government was doing everything possible to avoid doing so.
In addition, Italy and Spain are due to tap the bond market on Thursday, and investors were also nervous about whether those highly indebted countries would be able to raise funds at sustainable levels in 2011.
Some analysts said the euro could gain once the three auctions were out of way, though if borrowing costs stayed high any gains would be temporary as attention would turn to when a call for outside assistance might come.
“The euro may get see a bounce -- a knee-jerk one -- if these auctions see a good bid-to-cover ratio,” CIBC’s Stretch said. “But success will come at a price.”
The euro climbed on the crosses, rising to 107.50 yen from a four-month low of 106.83 yen set on Monday. It was up 0.2 percent on the Swiss franc at 1.2530 francs from Monday’s low of 1.2432.
The dollar index .DXY , which tracks the greenback's performance against a basket of major currencies, was last at 80.97, up 0.1 percent. The dollar traded at 83.08 yen, up 0.4 percent on the day, on Japanese importers' bids.
The Australian dollar shed more than 1 percent, with the news of more floods in the country’s northeast prompting speculators to take profits. It hit a one-month low of $0.9820, slipping below trendline support around $0.9856.
(Additional reporting by Hideyuki Sano in Tokyo)
Editing by John Stonestreet
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