* Middle East, sovereign accounts lift euro off lows
* Portuguese instability, Spain bank worries hamper
* Euro could fall back if no agreement on bailout fund
(Updates prices, adds trade recommendation)
By Neal Armstrong
LONDON, March 24 (Reuters) - The euro rebounded from an early fall on Thursday on Middle-East and sovereign buying, with worries over Portugal’s political crisis and the health of the Spanish banking system increasingly factored in to the currency.
Still, traders say rallies are likely to be shallow and the euro will struggle to rise past option barriers around $1.4250, the level it hit on Tuesday for the first time since early November.
The euro was up 0.4 percent on the day at $1.4138 EUR= recovering from a low of $1.4049 EUR= hit after Moody's said it had downgraded 30 Spanish banks by one or more notches, though notably not the biggest players, Santander and BBVA. [ID:nLDE72N0B1]
Also, Portugal’s prime minister quit on Wednesday after parliament rejected his government’s latest austerity measures, increasing the chances that the country will need a bailout. [ID:nLDE72M00L].
Market participants said the currency was growing resilient in the face of a string of bad news with robust support at lower levels from Asian central banks.
“The euro is becoming increasingly immune to issues affecting the euro zone but the markets may be getting too blase about the risks,” said Jane Foley, senior currency strategist at Rabobank.
News that European leaders are unlikely to take a decision on how to strengthen the euro zone’s bailout fund at a summit on Thursday and Friday, delaying the process until June, was seen as a key risk for the single currency. [ID:nLDE72M1E6]
“We think that no agreement at the EU summit on the bailout facilities should erode EUR support further in the near term.” said Valentin Marinov, currency analyst at CitiFX.
“Euro could retrace all of its gains above the $1.40 mark which materialised after the recent heads of state meeting in mid-March. Importantly, we doubt that this will trigger a sell-off in the euro of the kind we saw in the summer of 2010.”
The euro was helped by semi-official and Middle Eastern bids around the day’s lows and macro account demand. More bids from the Middle-East were highlighted at $1.4010/20.
The single currency was underpinned by yield differentials as euro zone interest rates are likely to rise in the near-term to counter inflationary pressures, while U.S. rates are set to remain low as its economy struggles.
Danish bank Dankse recommended buying the euro at $1.4122 for a target of $1.46, with stops at $1.38. They argued negative factors were “not enough to trigger a trend reversal ... as the support from relative monetary policy and global macro data remains very strong.”
European Central Bank Executive Board member Juergen Stark was quoted on Thursday as saying that analysts have made the correct assessment of the ECB’s message when it stopped saying that interest rates are appropriate. [ID:nFAT007197]
But some in the market question the ECB’s intent to tighten monetary policy at a time when some euro zone countries are suffering from fiscal issues, an issue which may haunt the euro in the future.
With the euro higher, the dollar index, which measures the dollar’s value against a basket of currencies, was slightly lower at 75.776 .DXY.
Against the yen, the dollar held steady from late U.S. trade at 81.00 yen JPY=.
Market players are wary that Japan may intervene further to sell the yen if the dollar drops below 80 yen, and especially if such a move occurs in volatile trade as was the case last week, when the yen hit a post-war record high of 76.25 to the dollar in the wake of a devastating earthquake and tsunami and a nuclear crisis.
At the same time, traders say Japanese exporters are likely to sell the dollar on any rallies, helping keep the yen stuck in a thin range against the dollar. (Additional reporting by Anirban Nag; Editing by Toby Chopra)