FOREX-Euro falls versus dollar ahead of EU summit

Wed Jun 27, 2012 8:33pm IST

* 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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