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FOREX-Euro struggles vs Swiss franc, dlr as caution reigns

Published 07/05/2011, 07:59 AM
Updated 07/05/2011, 08:04 AM

(Updates prices, adds quote)

* Weak EZ data, concerns over China lending dent risk appetite

* Speculation of U.S. corporate repatriation helps greenback

* Euro off 1-mth highs vs dlr, drops 1 pct vs Swiss franc

By Neal Armstrong

LONDON, July 5 (Reuters) - The euro retreated against the dollar and the Swiss franc on Tuesday as soft euro zone data and concerns over the health of the Chinese economy pushed investors away from riskier currencies back towards those perceived to offer safety.

Safe-haven German Bunds rose on continued uncertainty over plans to roll over Greek debt, keeping alive the risk of contagion while fresh data showed growth in the euro zone's dominant services sector slowing to its weakest pace since October.

Euro zone retail sales data was also weaker than forecast, all of which tempered investor appetite for riskier currencies. .

"The rally in risk over the past few days has run its course and better data is needed to sustain it," said Gavin Friend, currency strategist at nabgroup.

"Euro zone data this morning has been less than encouraging, while there are still plenty of hurdles for Greece to get over," he added.

The euro shed 1 percent against the safe-haven Swiss franc to a low of 1.22059 francs, pulling back from a five-week high hit on Monday of 1.2346 on trading platform EBS. It was last down at 1.2234, with stops cited below 1.2200 francs.

The common currency was down around 0.5 percent against the dollar at $1.4466 , taking a breather from recent gains made after Greece approved tough austerity measures last week.

The common currency rallied over 2 percent against the greenback last week in its best weekly performance since January. It suffered a setback on Monday after credit rating agency Standard & Poor's warned it would treat a rollover of privately held Greek debt now being discussed as a selective default.

S&P's warning came after euro zone finance ministers approved a 12 billion euro loan for Greece, which it needs to avert immediate default. However, it still needs a second aid package worth some 110 billion euros, which euro zone finance ministers said would be finalised by mid-September.

Market players said the euro would be supported if the European Central Bank (ECB) raises interest rates as expected on Thursday and signals more tightening to come.

Traders highlighted support at the top of the euro's Ichimoku cloud, coming in around $1.4454 on Tuesday, while the $1.4430 area was said to be pivotal.

CHINA BANK WORRIES

UBS said in a note that while sentiment for the euro had improved somewhat, there was still a lack of details about private sector involvement and heightened uncertainty about rating agencies' reaction to the Greek debt rollover plan.

As such, it advised investors to sell the euro/Swiss pair on any rally.

"We could hit new lows over the next four weeks to three months," said UBS strategist Manuel Oliveri. "The general assumption is that it remains on a downside trend and we are seeing short positioning from hedge funds."

Earlier, Chinese media reports about a possible rate rise in China this weekend, as well as a report by rating agency Moody's saying the scale of problem loans to local governments in China may be much bigger than previously thought, weighed on risk appetite.

"Heightened negative sentiment over China's growth outlook following Moody's raising concerns over the Chinese banking sector has contributed to an overall pick-up in risk aversion, which has helped the dollar pick up a bid," said Lee Hardman, currency strategist at BTM-UFJ.

"There's also increasing speculation over a second U.S. Homeland Investment Act developing. The first HIA in 2004 provided quite a boost for the dollar," he added.

Under the initial HIA, U.S. companies earning profits overseas received a significant tax break by repatriating the money back to the United States.

The dollar index , which tracks the greenback's performance against a basket of major currencies, bounced off one-month lows to trade at 74.491, up 0.3 percent.

But with legislation for a second HIA still in the works and escalating concerns over the U.S. fiscal situation, the dollar's gains could be capped.

The dollar received additional overall support from its advance against the Aussie after the Reserve Bank of Australia kept its key cash rate unchanged at 4.75 percent, citing sluggishness in the economy outside the booming mining sector.

The Aussie slipped below its 55-day moving average to as low as $1.0664 , its lowest since June 29, before recovering to $1.0700, down 0.3 percent for the day.

Against the yen, the dollar rose 0.5 percent to 81.13 but stayed stuck in its 79.80-81.30 yen range of the past few weeks. (Additional reporting by Anirban Nag, Nia Williams; Editing by Susan Fenton)

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