Euro consolidates after rally; can rise further

Dated Posted: 2011-10-28

LONDON, Oct 28 - The euro eased from a seven-week peak on Friday as markets consolidated after a huge relief rally in riskier assets sparked by a deal on Europe's debt crisis, though further gains were eyed with asset managers still to cut short positions.

 

The deal included an agreement that private banks and insurers would accept 50 per cent losses on their Greek debt holdings, leveraging of the EU bailout fund and recapitalisation of its banks.

 

While the agreement is unlikely to solve all Europe's financial problems, the clear signs of progress, combined with healthy U.S. third-quarter GDP, made the outlook more favourable for risk-seeking trades.

 

Traders said funds that had been underweight risk in the past few months piled back into markets for fear of missing out on a more sustainable rally into the year-end.

 

The euro, which hit a seven-week high of $1.4248, was close to flat for the day at $1.4165 . Traders pointed to small offers starting to build up above $1.4200 and stops at $1.4260, with bids reported back at $1.4120/00.

 

"The rally can continue because asset managers are still quite short of the euro and it could take a move to $1.44 before their positions are back to neutral" said Manuel Oliveri, currency strategist at UBS in Zurich.

 

Speculators and investors have been heavily short of the common currency in recent months as concerns about the euro zone's debt crisis spreading to larger countries within the bloc intensified.

 

Technical analysts said the euro's outlook had been boosted by Thursday's close above the 200-day moving average, now seen as support around $1.4100. They are also looking for a weekly close above the 200-week moving average at $1.3989 to add to the positive picture.

 

In the longer term, however, the euro remains vulnerable as the EU still needs to find the money for the newest version of its bailout fund, with doubts lingering as to whether its new size of around 1 trillion euros ($1.4 trillion) will be enough to staunch the crisis.

 

"The implications of the Greek PSI (private sector involvement) and the EFSF leverage, in terms of concrete implementation and sovereign ratings in particular, are the two main sources of uncertainty," said Frederik Ducrozet, an economist at Credit Agricole.

 

The purchase of EFSF bonds is not on the agenda of the upcoming G20 summit, Chinese Vice Finance Minister Zhu Guangyao said on Friday. European policymakers are keen to encourage China in particular to commit to investing in the EFSF's special purchase investment vehicle.

 

The currency options market also indicated a fair amount of optimism about the euro, with declining volatility suggesting investors see less need to hedge against any negative events that may come out of Europe.

 

While those tentative signs so far bode well for the euro, traders will be able to gauge to what extent the EU deal has really improved sentiment for the highly indebted countries at an Italian auction later today.

 

NURSING LOSSES

 

The dollar steadied after sustaining heavy losses that caused its biggest one-day decline in more than two years against other major currencies, with more drops looming ahead.

 

The liquid dollar, with its near-zero interest rates guaranteed over the next two years, was sold as investors used it to fund forays into risky trades.

 

Against the yen, the dollar was at 75.85 yen , having carved out yet another all-time low around 75.66 yen on Thursday.

 

The dollar index was last at 75.052, up slightly for on the day, having dropped from as high as 76.299 on Thursday.

 

Commodity currencies, among the biggest gainers on Thursday, fell prey to profit-taking. The Australian dollar was down 0.5 percent at $1.0668 , having surged on Thursday to $1.0753 from sub-$1.0400 in its biggest one-day rally in 16 months.

 

Source:   Reuters