FOREX-Euro holds gains vs US dollar but Spain squashes aid talk

Wed Oct 3, 2012 1:00am IST

* Spanish PM denies imminent call for European aid
    * Euro gains constrained by uncertainty, weak economy
    * Bids from Asian central banks cited at $1.2880
    * Aussie dollar falls after RBA rate cut

    By Gertrude Chavez-Dreyfuss and Daniel Bases
    NEW YORK, Oct 2 (Reuters) - The euro gained against the
dollar for a second straight session on Tuesday, pulling further
away from recent three-week lows on growing expectations that
Spain is ready to seek a bailout. 
    European officials told Reuters on Monday Spain, the euro
zone's fourth-largest economy, was ready to request a bailout
for its public finances as early as next weekend, but Germany
had signaled that it should hold off. 
    This was denied, however, by Spain's Prime Minister Mariano
Rajoy, who said on Tuesday a request for European aid was not
imminent. He also said Spain's central government had agreed
with regional leaders on a fiscal consolidation path.
.
    "Spain said a bailout demand was not imminent and the market
keeps it calm," said Kit Juckes, head of FX strategy at Societe
Generale in London. "The open question is whether the market
will take profit when they do. For now, the market continues to
run ahead." 
    A request for a bailout is viewed as positive for Spain and
the euro because it would trigger purchases of Spanish debt by
the European Central Bank that could lower the country's
borrowing costs. It also removes another layer of uncertainty in
the region's three-year old debt crisis.
    "(Spain's) recent budget proposal ... seemed intentionally
designed with a bailout request in mind and the market is
assuming it's just a question of when," said Brad Bechtel,
managing director at Faros Trading in Stamford, Connecticut. 
    But uncertainty over the timing of the request kept
investors on edge with many selling the euro at higher levels.
Another risk factor is rating agency Moody's soon-to-be
announced review of Spain's rating, which could see it cut to
junk status.
    Joe Manimbo, senior market analyst at Western Union Business
Solutions in Washington, added that worries about euro zone
growth would keep the ECB in easing mode, capping any euro
upside.
    Analysts said safe-haven currencies like the U.S. dollar and
the yen would be in demand until Madrid asked for aid. 
    The euro slipped from its highs as general risk sentiment
eased, although it still held ground against the greenback. The
euro was last up 0.23 percent at $1.2917, rising from
Monday's low at $1.2802, its lowest in three weeks.
    Short-term support levels in the $1.2910/20 area are seen
heading into the end of the trading day. A break of this level
would likely trigger weak stop-loss trades and push the euro
toward $1.2875/80, according to analysis from Thomson Reuters'
IFR Markets group. 
    It has eased from a four-month peak of $1.3169 hit in
mid-September after the ECB announced its bond-buying plan to
lower yields on peripheral euro zone debt and the U.S. Federal
Reserve teed up another round of monetary easing. 
    Still, some money managers are wary of the single currency
in the medium to long term, given gloomy economic prospects,
tough austerity measures and rising unemployment in the euro
zone. 
    "From a macro perspective, we would look to short the euro
against the dollar into any move higher as there is no growth in
the euro zone," said Howard Jones, adviser at RMG Wealth
Management. 
    "Value in the euro lies in the crosses, especially against
the yen given Japan's own problems and against the Australian
dollar because we are seeing commodity prices coming off." 
    Against the yen, the euro rose 0.36 percent to 100.89 yen
. The dollar gained 0.17 percent against the Japanese
currency to 78.11 yen, having hit a more than one-week
high of 78.21 after Japan's new finance chief warned of possible
action to cap the currency's rise. 
     
    RATE CUT DENTS AUSSIE 
    The Australian dollar fell to a four-week trough against the
U.S. currency and slid against the euro after the Reserve Bank
of Australia cut interest rates by a quarter point and left the
door open for more easing. 
    While the cut to 3.25 percent was not a complete surprise,
some analysts had thought Australia's central bank would wait
until November to lower interest rates. 
    Western Union's Manimbo said the key to the outlook for RBA
policy is the economic situation in China, Australia's No. 1
export market. "Further signs of weakness (in China) would keep
pressure on the RBA to cut rates further."
    The Aussie dollar fell to US$1.0291, its lowest
level since early September. It was last down 1 percent at
US$1.0252. The euro climbed 1.35 percent to A$1.2598.
    Neal Gilbert, currency strategist at GFT in New Jersey, 
recommended selling the Aussie dollar against the greenback on
any rally above the US$1.03 level, targeting US$1.0220.
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