May 20, 2010 / 5:44 AM / 9 years ago

FOREX-Euro loses grip as investors sell into bounce

* Speculators, macro hedge funds said to be selling euro

* Some talk Japan mutual funds selling euro, emerging assets

* Aussie hits 8-mth low, outlook grim

By Kaori Kaneko

TOKYO, May 20 (Reuters) - The euro fell on Thursday, edging back towards a four-year low as investors nervous over policy disarray in the euro zone trimmed their assets in the region and used the previous day’s bounce to sell the currency.

Higher-yielding currencies dropped, with the Australian dollar hitting an eight-month low, as a fall in Asian shares lowered investor tolerance of risk, traders said.

There was talk some managers of Japanese mutual funds or “toushin” were selling assets related to emerging markets, the euro zone and higher-yielding currencies, possibly to repatriate funds in case stock falls led toushin holders to cancel, they said.

The euro had rebounded from a four-year low of $1.2143 EUR= on Wednesday as traders covered short positions on speculation European monetary officials might move to check its rapid fall.

A European Central Bank spokesman declined comment on the market rumours, and Eurogroup Chairman Jean-Claude Juncker said in Tokyo on Thursday he did not see a need to take immediate action. [ID:nTOE64I038]

“After it rose above $1.2400, players such as speculators and macro hedge funds were said be selling the currency,” said a trader at a Japanese trust bank.

“But they probably don’t want to further build euro short positions after seeing its sudden rebound on Wednesday. So the euro may be supported around $1.23,” he said.

The euro fell 0.5 percent from late U.S. trade to $1.2348, having risen as far as $1.2433 on trading platform EBS in early deals. It gained more than 1.7 percent on Wednesday, notching its best one-day gain in more than a year.

Asian central banks, which have aggressively shifted foreign currency reserves to the euro in the past, were also suspected of selling, two traders said, helping to knock it down from $1.24.

Juncker, who met Japanese Finance Minister Naoto Kan, said monetary authorities were closely monitoring exchange rate developments but that he was concerned at the speed of the euro’s fall rather than its level.

The euro briefly dipped on his comments, but traders were sceptical about the chances of intervention at this stage as euro weakness is seen as positive for euro zone exports and financial market turbulence was not seen as extreme enough for such action.

On the charts, it is expected to face resistance around $1.2445, its May 18 high.

Increased uncertainty over market regulation in the euro zone was also a negative for the euro.

A day after Germany banned naked short-selling in euro zone bonds, CDS based on those bonds and some bank shares, cracks appeared in the euro zone, with many European governments wrong-footed by Berlin’s unilateral action. It suggested Europe was unable to form a united front in addressing its debt crisis.

“The euro’s bounce seems like a sucker’s rally,” Matthew Strauss, a senior currency analyst at RBC Capital, wrote in a note.

“Technically, a bounce in the euro was long overdue with daily valuations extremely oversold, net short euro positioning also at extremes and euro 25 delta risk reversals at record levels.”

Euro/dollar one-month risk reversals EUR1MRR=ICAP, a measure of currency sentiment, showed an extreme bias for puts.

The market is now favouring euro puts by about 3 percent, partly reflecting needs among investors to hedge against further declines in the euro, said an options trader for a major Japanese bank.

“Due to such outright selling flows, the euro is in a pretty solid declining trend,” he said.

The dollar was little changed against the yen at 91.65 yen JPY= and traders said the Japanese currency was likely to be supported on anxiety about more regulatory curbs following Germany's move.

Traders fear that regulators could target leveraged carry trades next. The low-yielding yen, which is used as a funding currency in carry trades, often gains during heightened uncertainty and risk aversion.

As a result, the outlook for high-yielding currencies was grim. The Australian dollar slid more than 2 percent to strike an eight-month low of $0.8300, and has lost nearly 6 percent this week. Against the yen, the Aussie AUDJPY= dived 2.4 percent to 76.14 yen. (Additional reporting by Anirban Nag in Sydney, Masayuki Kitano and Rika Otsuka in Tokyo; Editing by Joseph Radford)

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