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FOREX-Euro up in choppy trade, Aussie near 10-mth lows

ForexMay 20, 2010 08:27PM ET
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* 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)

FOREX-Euro up in choppy trade, Aussie near 10-mth lows

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