FOREX-Euro falls versus dollar ahead of EU summit
* Euro falls vs dollar, strong support seen around $1.2440 * Little progress on debt crisis expected at EU summit * Italian short-term costs rise NEW YORK, June 27 (Reuters) - The euro fell for a third day against the dollar on Wednesday and more losses were likely ahead of a European Union summit that is not expected to deliver new measures to ease the region's debt crisis. No move toward the issuance of common euro zone bonds appeared likely after German Chancellor Angela Merkel was quoted as saying Europe would not share total debt liability "as long as I live." German leaders have deflated expectations of any breakthrough from the two-day summit which starts on Thursday, but investors are reluctant to sell the euro aggressively in case any progress in tackling the debt crisis is made. Another factor checking the euro's losses is speculators already have large bearish bets against the common currency. "Merkel continues to paint the newswires with her thoughts on the EU way forward as the Eurobond concept does not appeal to her still, and the EU blueprint seems a little off in her eyes," said Brad Bechtel, managing director at Faros Trading in Stamford, Connecticut. "I don't think we will get anything substantive out of the EU summit and neither does the market after having been told as much over the past several days by EU officials." The euro was last down 0.2 percent at $1.2460, though off a two-week low of $1.2440 hit on Tuesday, using Reuters data, a level seen as providing strong technical support. The next downside target is a two-year low of $1.2288 hit on June 1. Some traders said a roadmap toward a common banking union or a decision at the summit to activate the euro zone's rescue fund to start buying Italian and Spanish government debt and lower their borrowing costs could provide relief to the euro. Italy's six-month borrowing costs rose to 2.957 percent at auction on Wednesday, their highest since December. The spike comes just ahead of a five-year and 10-year debt sale for up to 5.5 billion euros on Thursday. On Tuesday, Spain's short-term borrowing costs nearly tripled. Growing concerns that more peripheral euro zone nations will be shut out from capital markets, and expectations that fiscal austerity will drag the region into a more painful recession, will see the euro stay under pressure. Any bounce toward the $1.27 or $1.28 level would attract sellers, traders said. "I am going short euro/dollar into the summit," said Stuart Frost, head of absolute returns and currency at RWC Capital, a London-based fund manager. "The euro should be a lot lower than what it is, and even if there is an agreement, chances of which are very low, the currency is headed towards $1.20." A Nomura survey showed a majority of investors expect the summit to produce no concrete measures. Twenty-two percent expected "a bailout announcement of sorts" while 14 percent were looking for "a resolution towards banking union," reflecting an outside chance of a breakthrough. JAPANESE POLITICS Against the yen, the euro was 0.1 percent higher at 99.36 yen, having hit a two-week low of 98.71 the previous day. The common currency has lost around 1.6 percent against the yen so far this week. The dollar was 0.3 percent higher at 79.72 yen, but well below a two-month high of 80.59 yen hit earlier this week. Some market players said that while the yen was being supported by safe-haven inflows, political uncertainty stemming from a rift inside Japan's ruling party could start to weigh. Many investors outside Japan, though, are still unsure of the implications for the yen from the political uncertainty. "International investors have been burned so many times by trying to trade dollar/yen around Japanese political events. They are happy to watch the story unfold but unwilling to take positions, in FX at least," said Gareth Berry, associate director of G10 FX strategy for UBS in Singapore. Japan Prime Minister Yoshihiko Noda faces the risk of a split in his party that could trigger a snap election after his signature tax increase plan cleared parliament's lower house on Tuesday despite its rejection by a group of party rebels. The hike is aimed at curbing Japan's snowballing public debt, which already exceeds two years' worth of its economic output. Analysts at Morgan Stanley say the move to raise taxes will give the Bank of Japan more leeway to ease monetary policy and that is likely to be negative for the yen.
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