Euro steady on move by central banks, EU meet eyed

Dated Posted: 2011-09-16

SYDNEY/TOKYO, Sept 16 - The euro clung to gains on Friday, boosted by coordinated action from key central banks to add liquidity to the European banking system, although the rally is unlikely to last as the Greek debt crisis remains in a critical state.

Investors were reluctant to make heavy bets ahead of a meeting of EU finance ministers in Poland which U.S. Treasury Secretary Timothy Geithner will also join. Discussions are expected to focus on leveraging the euro zone's bailout fund to make it more effective in fighting the debt crisis.

The euro last changed hands at $1.3861 , off a one-week peak of $1.3937 hit on Thursday but well above a seven-month trough below $1.35 plumbed on Monday. The common currency has bounced some 2 percent so far this week.

"If we again only hear some verbal reassurances about Greek problems and no concrete action, that'd surely be the end of the rally in the euro," said Sumino Kamei, senior currency analyst at Bank of Tokyo-Mitsubishi UFJ.

The rally followed an announcement that the European Central Bank will liaise with the U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to provide three-month dollar loans to banks to prevent the money market from freezing up.

The three-month euro/dollar cross currency basis swap , or the relative premium for swapping euro LIBOR for dollar LIBOR, narrowed to around 89 basis points after the announcement, from as wide as 115 basis points on Monday.

Wider spreads reflect elevated demand to borrow U.S. dollars in the currency forward market and often support the greenback's spot value against the euro.

Technical analysts also said that although the euro is hovering near technical indicators showing that it is oversold in the short term, it remains vulnerable to further falls.

"Valuation-driven retracements to resistance at 1.4014 and 1.4263 are expected to attract renewed selling interest for a test of the next support level at 1.3428," George E. Davis, an analyst at RBC Capital Markets, wrote in a note to clients.

"A daily close below here would then expose 1.3246, with a close above 1.4484 required to nullify our bearish view," he said.

WELCOME FILLIP

Euro zone banks have faced dollar funding strains in recent months on mounting fears that Greece will default on its debt, hitting institutions that have large exposure to the nation.

"Obviously it's not a long-term solution, we need to see some resolution to the sovereign debt issue to give markets confidence that we'll have stronger growth over the medium term," said Spiros Papadopoulos, a senior market economist at National Australia Bank.

"Certainly these policy measures will help improve confidence in the short term," he added.

For now, support for the euro is seen at $1.3704, while major resistance is at $1.3937 and a break above would target $1.3975/$1.4000.

The Australian dollar , received a welcomed fillip after the central banks' move and gained more than 1 cent to last trade at $1.0349, off an overnight trough of $1.0183. It has been under pressure this week following heavy liquidation by foreign funds of long positions in Asian currencies on growing fears that another global credit crunch may be looming.

Asian traders linked falls in the Aussie to the liquidation by Goldman Sachs of its roughly $1.6 billion Global Alpha fund and some expected that, owing to its size, it could still put more pressure on the currency. The fund will be closed in the next few weeks.

"It's perfectly believable that they have been taking profits on whatever outperforming Asian assets they held, after massive losses sustained earlier by the fund," said a trader for a Japanese bank.

Global Alpha had tumbled 13 percent by early September, delivering a far worse performance than other hedge funds that rely on computer programs.

The dollar index gained 0.15 percent to 76.36. Against the yen, the dollar remained stuck at 76.77 yen .

The markets brushed off weak U.S. data showing higher-than-expected inflation and jobless claims, reinforcing views that the Federal Reserve will offer only modest stimulus measures.

The U.S. economy barely grew in the first half of this year, making it vulnerable to an escalation in Europe's debt crisis.

Source: Reuters