May 24, 2011 / 11:49 AM / 7 years ago

FOREX-Growth hopes draw euro off 2-mth low, still vulnerable

* Euro off 2-mth low; seen struggling to hold above $1.40 * Helped by stabilising German business sentiment

* Unresolved debt crisis casts cloud over single currency

(Adds quote, detail, updates prices)

By Neal Armstrong

LONDON, May 24 (Reuters) - Upbeat data from Germany helped the euro recover from a two-month low against the dollar on Tuesday, but it remained fragile due to fears that the euro zone’s debt crisis could spread.

Data from the Ifo think-tank showed German business sentiment stabilising unexpectedly in May, pushing the euro briefly back above $1.4100 EUR=, away from Monday's two-month low of $1.3968. [ID:nLDE74N0ND]

It dropped again, however, after the leader of Greece’s conservative political opposition rejected the government’s new package of fiscal measures to slash deficits. [ID:nATH006097]

The government has a comfortable majority in parliament and analysts said the euro’s reaction demonstrated how jittery markets are. Although holding above $1.4000, they said the euro was vulnerable to a break lower, especially if the debt crisis looks likely to spread to heavyweights like Spain and Italy.

Many analysts say the euro could fall to as low as $1.30 in the event of a Greek restructuring. [ID:nLDE74N0U1]

“Barring any negative comments out of Spain or Italy I would expect the euro to stay above $1.4000. But although it remains supported above that level the rallies are getting thinner,” said Kathleen Brooks, Research Director at

She added she expected the euro to stay below Monday’s high around $1.4145.

The euro last traded up 0.2 percent on the day at $1.4077, off a session high of $1.4117 when it ran into persistent selling from Middle-East accounts. Traders reported stop loss orders just ahead of the day’s high up to $1.4125, with more around Monday’s high.

Technical analysts said the euro’s 100-day moving average was still key support, coming in around $1.3974 on Tuesday. The euro has traded above its 100-day average since February. The closely watched Japanese Ichimoku cloud base also comes in around the same area.

“We have seen some buying of dips around the lows yesterday and today, but the euro is not yet a buy,” said Manuel Oliveri, currency analyst at UBS in Zurich.

Equity and commodity markets paused for breath following a recent bout of risk reduction which had helped push the dollar to a seven-week high on Monday against a basket of currencies of 76.366 .DXY. It was last down 0.1 percent at 76.032.


A Greek debt default would hurt other peripheral euro zone states, ratings agency Moody’s said in a statement on Tuesday, becoming the last of the three major rating agencies to say most forms of restructuring would constitute default. [ID:nLDE74N0AQ]

Standard & Poor’s cut its outlook for Italy to “negative” from “stable” on Saturday, while a crushing defeat for Spain’s ruling socialists in local elections raised worries about Prime Minister Jose Luiz Rodrigo Zapatero’s ability to meet fiscal targets. Madrid has been seen as an example of fiscal reform.

“We could have a period of consolidation in the near-term for the euro, but it’s not likely to last,” said Lee Hardman, currency strategist at BTM-UFJ.

“Underlying pressures are still to the downside. The sovereign debt crisis is still unresolved and the risks are that it escalates later in year,” he added.

The New Zealand dollar gained more than 1 percent on the day to $0.7996 NZD=D4 after a quarterly survey on behalf of the Reserve Bank of New Zealand (RBNZ) showed inflation expectations in the country rose in the second quarter. [ID:nL3E7GO06Y]

The Australian dollar was up 0.3 percent to $1.0542 AUD=D4, off a one-month low of $1.0478 hit on Monday.

The dollar slipped 0.15 percent to 81.80 yen JPY=, though some traders said the dollar's recent strength could help the pair test a March 19 high of 82.23 yen. (Additional reporting by Hideyuki Sano and Jessica Mortimer; Editing by Patrick Graham)

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