* Short covering and intervention talk drive up euro
* USD and yen supported by flight to safety
* Aussie struggling near 10-mth lows, risk reversals spike
By Anirban Nag
SYDNEY, May 21 (Reuters) - The euro inched up on Friday as a
bout of short-covering extended, while the Australian dollar was
struggling near 10-month lows hurt by a wave of long liquidation
by investors like hedge funds and Japanese margin traders.
The yen and the U.S. dollar were broadly higher as
sentiment towards riskier assets continued to suffer on mounting
worries about the euro zone which led investors to sell stocks
and commodities in droves. The yen and the greenback are
generally favoured when there is a spike in risk aversion.
In Asian trade, the euro firmed to $1.2540 from
$1.2507 late in New York on Thursday when it went as high as
$1.2598. It got a boost on Thursday, helped by its gains versus
the Swiss franc and speculation European monetary officials might
intervene to prop up the single currency.
On the year, however, the euro is down over 12 percent
against the dollar. Despite Thursday's rise, sentiment on the
currency remains decidedly negative, with investors concerned
about a seeming lack of unity among euro zone leaders in
addressing the region's debt crisis. [ID:nSGE64J05H]
More investors sold the high-yielding Australian dollar
, spurred by uncertainty over financial market regulation
after Germany banned some speculative trades and by worries that
the euro-zone debt problems would hurt global growth.
The Australian dollar was down at $0.8161, not far
from a 10-month low of $0.8071. It lost over 3 percent on
Thursday. The Aussie/yen was down at 73.48 yen, near
levels not seen since last July as carry trades were unwound by
nervous margin traders.
"This is a classic shift in investor focus," said Greg Gibbs,
currency analyst at RBS. "The Aussie has plunged through some key
technical levels and will find it tough to regain its feet. It
will be treated as one of the primary vehicles to express a
negative view on the European debt crisis and fears of sustained
contagion to the global banking system."
Indeed, Aussie/dollar 1-mth risk reversal
shows an extreme bias for Aussie puts with markets now favouring
puts by over 6 percent. That partly reflected a growing need
among investors to hedge against further declines in the Aussie,
although option traders said liquidity conditions were very thin.
The Aussie also slid on the euro , falling to its
lowest since Feb. 12, with the euro partly helped by talk of
suspected intervention by Swiss authorities in the euro/Swiss
cross.
Swiss National Bank Vice Chairman Thomas Jordan on Thursday
repeated a pledge to shield Switzerland from the euro zone debt
crisis that could potentially lead to deflation.
The euro was at 1.4401 Swiss francs, not far from
Thursday's high of 1.4455. Euro/yen was up in volatile
trade, at 112.45 yen after having fallen by more than 1.5 percent
on Thursday.
The dollar recovered some of its steep losses against the yen
inching up to 89.85 yen, after having lost more than 2
percent. The dollar index <.DXY> was up 0.32 percent at 85.84.
(Editing by Mark Bendeich)
