FOREX-Euro soars on EU deal; investors remain cautious
Sat Jun 30, 2012 1:47am IST
* EU leaders allow more flexibility in rescue funds
* Skepticism remains; scope for more gains limited
* Aussie, kiwi dollars rally, while safe-haven USD tumbles
NEW YORK, June 29 (Reuters) - The euro remained on track for
its biggest one-day gain against the dollar in eight months on
Friday after euro zone leaders agreed on measures to stabilize
banks and reduce borrowing costs for Italy and Spain, but the
rally looked set to be short-lived.
Euro zone leaders agreed that its rescue funds could be used
to stabilize bond markets without forcing countries that comply
with EU budget rules to adopt extra austerity measures or
economic reforms.
Details of the agreement, which also includes the creation
of a single supervisory body for euro area banks, remain
unclear. Still, the outcome surprised investors who had
positioned for the euro to weaken as expectation for any action
during a two-day European Union summit had all but vanished.
"This is another Band-Aid," said Michael Woolfolk, senior
currency strategist at BNY Mellon in New York. "There was not
anything material that came out of the discussion that would
help resolve the crisis."
Woolfolk said he maintained his three-month forecast for
euro/dollar at $1.20, adding that the summit "actually
reinforces it."
The euro rose as high as $1.2692 on Reuters data, the
strongest since June 21, and was last at $1.2646, up 1.7 percent
and on track for its biggest daily percentage rise since late
October.
Despite Friday's gains, the euro zone common currency was on
pace for a loss of 5.2 percent this quarter, the biggest since
September.
Spanish and Italian government bond yields fell sharply on
the EU deal, while 10-year Irish government bond yields fell to
their lowest since before the country agreed to its
international bailout.
Against the yen, the euro jumped to a one-week high of
101.39 yen and was last at 101.16, up 2.4 percent. It
was the biggest one-day gain since March 2011, using Reuters
data.
The euro also rose 0.8 percent versus sterling to 80.79
pence.
Neil Jones, head of hedge fund sales at Mizuho Corporate
Bank in London, said the expectation for end-of-month window
dressing in the stock market "is forcing the 'risk on' hand".
"The euro (is) responding by moving higher and triggering
short-covering," he said.
Net short euro bets rose to 159,880 contracts from net short
positions of 141,066 in the prior week, according to data
tabulated to Tuesday but released by the Commodity Futures
Trading Commission on Friday.
Much of the change was from a drop of 17,516 contracts in
long positions, not from the rise of 1,298 contracts in short
positions.
The most recent data from Toronto-based OANDA showed
investors were 54.59 percent euro short, or betting against the
euro versus the dollar, as New York trading drew to a close on
Friday.
The dollar rose 0.6 percent to 79.89 yen but was on
track for a quarterly loss of 3.5 percent, also the largest
since September.
ECB EYED
Analysts said the euro could make further near-term gains,
supported by month- and quarter-end flows. But they expect the
rally to fade next week as investors worry some steps are just
short-term solutions and others will take time to implement.
Ian Stannard, head of European currency strategy at Morgan
Stanley in London, said he does not expect it to rise much
beyond $1.27. "It will not be too long before the market
realizes there is not much new in the agreement, and that
anything that is new has a huge amount of conditionality in it."
Traders said the euro could struggle ahead of chart
resistance at the $1.2747 June high. Near-term support was at
the 21-day moving average, currently at $1.2546, with stop-loss
sell orders reported below.
Some analysts pointed to execution risks in the move to
empower the European Central Bank with a supervisory role that
could prove to be contentious. The market would also soon start
to question whether the euro zone's rescue fund has enough
resources to recapitalize banks and buy peripheral bonds.
Attention will turn to an ECB meeting next week, with an
increasing number of analysts expecting policymakers to opt to
cut interest rates from their current 1 percent.
The rally in risk appetite buoyed higher-yielding,
growth-linked currencies. The Australian dollar rallied to the
strongest since early May and last traded at $1.0229, up 1.9
percent. The New Zealand dollar rose 1.6 percent
to $0.8003.
