July 26, 2012 / 12:17 PM / in 5 years

FOREX-Euro surges against dollar on Draghi pledge

* Euro rises 1 pct against dollar, yen

* ECB head says will do whatever needed to save euro

* Dollar also down 1 pct vs Swiss franc, Aussie dollar

* Analysts say gains may be shortlived

By Michael Szabo

LONDON, July 26 (Reuters) - The euro jumped against the dollar on Thursday, reversing earlier losses, after European Central Bank chief Mario Draghi said the bank would do whatever it takes to preserve the single currency.

The euro rose 1 percent to a one-week high of $1.2288, taking it well above a low of $1.21178 touched earlier in the session.

Speaking at a conference in London, Draghi pledged to do whatever necessary to protect the euro zone from collapse, including fighting unreasonably high government borrowing costs for countries such as Spain and Italy.

But analysts were sceptical the euro’s gains would be sustained given worries about the possibility of Spain applying for a sovereign bailout or Greece leaving the monetary union.

“There is some market optimism on the comments but I didn’t see any hard news in them, so we’ve seen a technical reaction in a thin market and, like yesterday, that’s triggered more short (covering),” said Peter Wuyts, a market analyst at KBC, referring to investors unwinding bets against the euro.

On Wednesday, the euro recovered from a two-year low of $1.2042 after Austria’s European Central Bank Governing Council member Ewald Nowotny discussed the merits of giving the euro zone bailout fund a banking licence.

Better investor appetite to take on risk dented the safe-haven U.S. dollar, which fell 0.7 percent against a basket of currencies to 82.91.

It lost nearly 1 percent against the Swiss franc and against the higher-yielding Australian and New Zealand dollars.

The euro also gained more than 1 percent against the Japanese yen to 96.121 yen after Draghi’s speech.

But analysts said there was little new or of substance in recent comments by policymakers and they expected traders to sell into any rally.

They said the past two days’ gains may have been overdone and the euro could re-test recent lows and target the psychological $1.20 level followed by 2010’s low around $1.1875.

“The only thing that could change the downtrend in the euro is if the Fed launched further quantitative easing or some other additional policy measures. Otherwise it’s all about what happens in the euro zone,” said Richard Falkenhall, currency strategist at SEB in Stockholm.

Any hints at further quantitative easing at a U.S. Federal Reserve policy meeting next week could bolster the euro, as asset buying by the central bank would increase the supply of dollars in the market and weigh on the greenback.

Speculation the Fed may adopt monetary easing steps could grow louder if U.S. second-quarter gross domestic product data due on Friday is weak, although most expect the central bank to hold back for now.

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