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FOREX-Euro stays on defensive as debt worries weigh

Published 06/10/2011, 02:09 AM
Updated 06/10/2011, 02:12 AM

* Euro may drift towards $1.42-$1.43 in near term -strategist

* Dollar/yen weighed down by exporters, sell orders near 81 yen

* Aussie falls after brief rise with won on surprise Korean rate hike

By Chikafumi Hodo and Ian Chua

TOKYO, June 10 (Reuters) - The euro struggled to regain its footing on Friday although it held above one-week lows as worries about the euro-zone's debt problems overwhelmed any support from a likely interest rate rise by the European Central Bank next month.

Market participants shifted their focus back to debt problems in Greece and other euro-zone countries, using that as an excuse to unwind long euro positions built up over the last three weeks, when the currency climbed back from a two-month low below $1.4000 hit on May 23.

ECB President Jean-Claude Trichet signalled that the benchmark refinancing rate, now at 1.25 percent, would rise next month. But markets expected as much and had already priced in the prospect of a July rate hike.

The central bank also kept its 2012 inflation forecast unchanged, suggesting the pace of euro zone interest rate hikes may be slower than previously thought.

"The ECB's stance regarding inflation and interest rate rises is not as strong as originally perceived by the market, and this triggered euro selling. We're likely to see a rate hike next month, but we aren't sure about the future," said Osamu Takashima, chief forex strategist at Citibank in Tokyo.

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"The euro is expected to come under gradual selling pressure and could aim for $1.42-$1.43 in the near term, while on the upside it is expected to be weighed down around $1.46."

The euro was down 0.1 percent at $1.4496 in afternoon Asian trade, having fallen as low as around $1.4477 the previous day.

Solid technical support is seen at $1.4419, a 38.2 percent retracement of the May 23-June 7 rally.

RESTRUCTURING FOR GREECE

The market was concerned about the ECB's steadfast rejection of any form of debt restructuring for Greece, which is favoured by Germany in particular.

The euro fell 0.4 percent to 116.14 yen , not too far away from a one-week low of just under 116.00 yen reached the previous day.

"All said and done, investor sentiment is such at the moment that the discord amongst euro zone policy-makers and their inability to move beyond stop-gap measures to contain the sovereign debt crisis continues to dominate investment decision-making," said Samarjit Shankar, managing director of global FX strategy at BNY Mellon.

Not surprisingly, BNY Mellon's flows analysis showed Greek, Portuguese, Spanish and Italian bonds remained out of favour among investors.

The dollar edged down on the yen as profit-taking emerged after it reached a one-week high near 80.50 yen.

Selling by exporters was more visible this week, with sizable sell orders lined up near 81 yen, which are expected to block the dollar's rises, Tokyo dealers said.

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The dollar fell 0.3 percent to 80.13 yen after reaching a one-week high of 80.47 yen.

Still, Japanese investors and importers were expected to show strong dollar-buying interest below 80 yen, dealers said.

The Australian dollar fell 0.3 to $1.0598, pulling back after tracking advances in the Korean won on the South Korean central bank's surprise move to raise its policy rate by a quarter point.

"The Aussie gained after the BOK rate hike, not because it's particularly strongly connected to the won, but because the U.S. dollar weakened against all other currencies after the move, including the won," said Minori Uchida, a senior analyst at Bank of Tokyo-Mitsubishi UFJ.

"I don't think the Aussie has enough power to advance further. It was rather scooped up on dips."

The dollar index rose 0.1 percent to 74.2552, near a one-week high of 74.297 reached on Thursday.

The Aussie was hit this week by data showing a slowdown in employment growth and a statement from the central bank that was interpreted as showing no urgency to raise rates. (Additional reporting by Antoni Slodkowski and Yoshiko Mori; Editing by Michael Watson)

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