November 22, 2011 / 11:36 AM / in 6 years

REFILE-FOREX-Dollar holds near 6-week high, sentiment still shaky

* Dollar index near 6-week peak as US debt concerns weigh
    * Little reaction to jump in yields at Spanish auction
    * Euro boosted by short covering, downside risks seen

    By Nia Williams	
    LONDON, Nov 22 (Reuters) - The dollar hovered near a
six-week high against a basket of currencies on Tuesday as
worries that politicians on both sides of the Atlantic were
failing to tackle huge debt burdens weighed on investor appetite
for risk.	
    Percieved riskier currencies regained some ground after
coming under pressure during the previous session, but dollar
funding strains continued to support the U.S. currency as
European banks scrambled to secure cash dollars.	
    Signs the dollar money market was seizing up added to
investor concerns the spiralling euro zone debt crisis could
pummel European banks. 	
    The dollar index was last trading down 0.2 percent on the
day at 78.147, within reach of Monday's peak of 78.516 which was
the highest level since Oct. 10. Investors had reached for the
safety of the world's most liquid currency after a "super
committee" of U.S. lawmakers failed to agree on a deficit
cutting plan. 	
    The euro was up 0.3 percent on the day at $1.3535,
with short covering helping the single currency climb off
session lows around $1.3469. Traders cited stop-loss orders
around $1.3575-85.	
    "We have recovered a bit off the lows but the risk
environment is going to be still very challenging. The big
events in the U.S. and Europe are still coming out as negative
and providing a bearish backdrop for investors," said Ian
Stannard, head of European FX strategy at Morgan Stanley.	
    "Any rebounds in the euro are going to be fairly
short-lived. Dollar funding concerns are still a very big factor
and are keeping risk appetite quite constrained."	
    A jump in Spanish bond yields to their highest in 14 years
at a short-term bill issue on Tuesday highlighted market
concerns about the euro zone's ability to overcome its debt
crisis although the jump was not unexpected and the euro showed
little immediate reaction. 	
    Stannard said apart from a brief spike higher on Friday the
euro's upside had been capped around the $1.3550 level over the
past week and he expected the euro to retreat if it failed to
break above that level on Tuesday.	
    Stress in the dollar money market showed no sign of abating
after the three-month euro/dollar swap spread rose to 140 basis
points on Monday, the highest level since late
2008. It was last around 138 basis points.	
     	
   EYE OF THE STORM	
   Market players said speculation that the already huge bets
made against the euro could lead to further bouts of short
covering had helped support the single currency above a six-week
low of $1.3421 hit last week.	
    Data from the Commodity Futures Trading Commission last
Friday showed that net euro short positions rose to 76,147
contracts in the week through Nov. 15, from 54,257 a week
earlier.   	
    Talk of continuing repatriation of foreign assets by
European players has also helped put a floor under the single
currency and discouraged short sellers.    	
   Still, the common currency could be under renewed pressure
soon unless policymakers come up with drastic measures to tackle
the euro zone debt crisis and stop investors dumping euro zone
government bonds.  	
   "There are so many different issues to be solved at the
moment. The European Commission is trying to cut to the chase on
euro zone bonds but it's almost a waste of time given Germany is
showing no signs of capitulating on that front," said Neil
Mellor, currency strategist at Bank of New York Mellon.	
    "It is unclear what is going to take us through this crisis
and where we will stand in six months' time. Given the lack of
answers to these questions it's remarkable how resilient the
euro has been."	
   The European Commission has set out in a paper to be
published on Wednesday how closer monitoring of countries'
budgets could in the long run make it possible to issue jointly
underwritten euro zone debt.   	
   The dollar was steady against the yen at 76.88,
retreating from a session high of 77.35 after some traders took
comments by Finance Minister Jun Azumi as hinting at more
intervention by Japan. He in fact merely stated that huge buying
of foreign bonds by the Bank of Japan would not be in line with
government thinking.  	
   The Australian dollar pared heavy losses incurred on
Monday. It was up 0.1 percent on the day at $0.9862 but
was still below a support-turned-resistance level of around
$0.9910, a 61.8 percent retracement of its October rally.

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