October 4, 2011 / 7:15 PM / 8 years ago

FOREX-Euro selling takes a breather, rallies from 9-mth low

* Trichet seen as not overly dovish

* Bernanke says ready to act to help economy

* Threat of Greek default still unnerving (Recasts, updates prices, adds comment, byline)

By Gertrude Chavez-Dreyfuss

NEW YORK, Oct 4 (Reuters) - The euro rebounded from a near nine-month low against the dollar on Tuesday in a move seen as an overdue correction after falling two straight days, although its outlook remained bleak due to persistent sovereign debt stress.

Analysts said the single currency gained traction after European Central Bank President Jean-Claude Trichet did not signal a rate cut for Thursday’s ECB meeting in his comments before the European Parliament. Most market participants had priced in at least a 25 basis-point easing this week.

For Trichet story, click on [ID:nL5E7L43CS].

Remarks from Federal Reserve Chairman Ben Bernanke saying the Fed is prepared to act further to help the economy also benefited the euro indirectly and hurt the greenback. While Bernanke’s statements were nothing new, investors latched on to them anyway as they trimmed their long dollars and short euro positions, which have become over-extended.

Further stimulus to the U.S. economy could mean that the Fed may once again flood the market with dollars, depreciating its value. Click on [ID:nN1E7930IZ] for Bernanke’s comments.

“This is just a correction in a euro bear market,” said Jay Meisler, co-founder of Global-View.com in Huntington, New York.

“Part of the rally could be traced to Trichet as well. He could have signaled a rate cut today, but he did not. So you’ve got to go on the assumption that the ECB is not going to cut rates this week.”

The move higher in the euro fed on itself as investors who had bet against the single currency were forced to buy and cover short positions to prevent more losses.

The euro rose as high as $1.33163 EUR=EBS on trading platform EBS. It last traded at $1.32400, up 0.5 percent on the day.

Global-View’s Meisler said the euro needs to get back above last week’s low of $1.33600 before the rally could be taken seriously.

Investors were cautious overall about the euro’s gains and most believed its rise would lose momentum.

Earlier the euro weakened after European finance ministers debated making banks take bigger losses on Greek debt and delayed a vital aid payment to Athens until mid-November.

The euro EUR=EBS fell to $1.31450 on EBS, its weakest since January as a slide in stocks and a collapse in the shares of Franco-Belgian banking group Dexia (DEXI.BR) -- which has hefty exposure to Greek debt -- prompted flight to the safety of the world's most liquid currency.

Investors still see a growing possibility of a default in Athens as euro zone finance ministers look to force banks to take bigger losses on their Greek debt holdings, while the next aid tranche for the country has been delayed until mid-November. [ID:nL5E7L34AJ]

Prospects on the euro turned increasingly negative after a bearish cross on the 50- and 200-day moving averages, while support was seen at $1.30400, a 61.8 percent retracement of the rally from June 2010 to May 2011.

Chris Fernandes, vice president and foreign exchange adviser at San Ramon, California-based Bank of the West said the euro would test $1.3000 but not before the ECB meeting on Thursday.

In other currencies, commodity units such as the Australian and Canadian dollars took a beating amid a slide in oil, gold, and copper.

The Australian dollar hit a one-year low of US$0.9388 AUD=D4, down around 17 percent from the post-float high it touched in July, as an increasing number of investors start to worry about Chinese growth. The Aussie was floated in 1983.

The Aussie dollar extended losses after the country’s central bank opened the door to possible monetary easing as early as next month if upcoming inflation data proves benign.

From a technical standpoint, it also looks prone to more selling given a “death cross” of the 50-day moving average under the 200-day average, the first such formation in more than a year.

The Canadian dollar also fell, pushing the U.S. dollar to a one-year high at C$1.0636 CAD=D3. (Additional reporting by Nick Olivari; Editing by Andrea Ricci)

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