Euro consolidates gains; yen edges lower

Dated Posted: 2011-11-29

SINGAPORE, Nov 29  - The euro edged up against the dollar on Tuesday, consolidating the gains made the previous day on hopes that European officials will finally make some progress in tackling their debt crisis this week.

 

But ever conscious that policymakers can easily disappoint yet again, markets will be hard pressed to keep pushing the common currency higher in the absence of concrete action, traders said.

 

There was little reaction in Asia to news Fitch had cut the credit outlook for the United States to negative, though it expected no move on the actual rating until late 2013.

 

The euro also showed limited reaction to a report on French newspaper La Tribune's website saying Standard & Poor's could change the outlook for France's triple-A rating to negative within the next 10 days.

 

The single currency rose 0.4 per cent to $1.3366. The euro had risen to a high of $1.3399 on Monday even after the IMF firmly denied an Italian newspaper report it was in talks to bail out Italy.

 

Traders said markets were simply looking for an excuse to cut bearish positions on the euro and commodity currencies, after going short risk ahead of the U.S. Thanksgiving holiday. The euro had dropped some 7 per cent from the Oct. 27 peak of $1.4248 to a trough near $1.3213 on Friday.

 

"We remain cautious as the market remains vulnerable to headline risk ahead, with the Eurogroup/Ecofin meetings taking place over the next two days," BNP Paribas analysts said.

 

Euro zone finance ministers meet later on Tuesday to approve detailed arrangements for scaling up the EFSF rescue fund to help prevent contagion in bond markets. They are also expected to release a vital aid lifeline for Greece.

 

Germany and France reportedly aim to outline proposals for a fiscal union before a European Union summit on Dec. 9, increasingly seen by investors as possibly the last chance to avert a breakdown of the single currency area.

 

"Policymaking in Europe seems to be moving in the direction of further integration, which is positive, but uncertainty remains about getting there in time to save the euro. A breakup of the euro zone can be avoided, but bold measures are needed soon," Jose Wynne, analyst at Barclays Capital wrote in a note.

 

In coming days, the euro could take its cues from a series of bond auctions in the region, including an auction later on Tuesday by Italy, which plans to raise up to 8 billion euros in the bond market.

 

YEN EDGES LOWER

 

The dollar extended its recent gains versus the yen, hitting a one-month high of 78.29 yen on trading platform EBS at one point. After trimming some gains, the dollar stood at 78.06 yen, up 0.1 per cent on the day.

 

Traders cited dollar/yen and cross/yen buying by Japanese banks, as well as yen-selling by hedge funds on Tuesday.

 

In a sign that market players may be positioning for further gains in the dollar, the mid point for the one-month dollar/yen risk reversal spread stood at 0.35 per cent in favour of dollar calls.

 

A reading in favour of dollar/yen calls is a rare occurrence since Japanese exporters have persistent needs to buy dollar puts to hedge against their dollar exposure.

 

The yen fell broadly, with the euro rising 0.5 per cent to 104.31 yen and the Australian dollar climbing 0.9 per cent to 77.87 yen.

 

A trader for a Japanese brokerage house in Tokyo said dollar/yen has been supported recently by year-end position unwinding as well as some yen-selling flows from investors taking a bearish view towards Japanese assets.

 

"There have been some yen-selling flows since yesterday from players such as macro funds, probably based on a sell JGBs, sell Japan type of view," the trader said.

 

Position unwinding ahead of the year-end is also probably helping to weigh on the yen and support the dollar, he said.

 

Currency speculators increased their net long position in the yen to 43,180 contracts in the week ended Nov. 22, data from the U.S. Commodity Futures Trading Commission shows, suggesting that the yen may come under pressure if such positions are unwound.

 

The same data also shows that speculators increased their bets against the euro from a week earlier, suggesting that short-covering may lend the euro support.

 

Source:  Reuters