FOREX-Euro soars to six-week high vs dollar but outlook cautious

Mon Dec 3, 2012 8:22pm IST

* Euro gains on short-covering, stop-loss buying

* Spain formally asks for European funds to recapitalize banks

* Merkel does not rule out Greek debt haircut

* Euro vulnerable to flare-up in "fiscal cliff" worries

By Julie Haviv

NEW YORK, Dec 3 (Reuters) - The euro leaped to its highest level against the U.S. dollar in six weeks on Monday as concerns abated about debt-burdened Greece and Spain while Chinese data allayed worries about global economic growth.

The single currency shared by 17 countries, which was already gaining on signs Germany may be open to a Greek debt write-down, hit new highs after Spain formally asked for European funds to recapitalize its banking sector.

Demand for euros was also buoyed by economic data out of the region.

German Chancellor Angela Merkel said on Sunday Greece's creditors may look at writing down more of its debt, a move that would make the country's debt burden more easily sustainable.

Greece said it would spend 10 billion euros ($13 billion) to buy back bonds at a price range that topped market expectations, boosting hopes it can cut its ballooning debt and unlock long-delayed aid.

A successful buyback is central to the efforts of Greece's foreign lenders to put the near-bankrupt country's debt back on a sustainable footing and would clear the way for the funding Athens needs to avoid running out of cash.

"The successful completion of the repurchase will unlock bailout cash from the IMF and help secure the flow of rescue funds from the so-called "troika" in 2013," said Ilya Spivak, currency strategist at DailyFX in New York.

Greece's "troika" of lenders includes the International Monetary Fund, European Union and the European Central Bank.

"Confidence may be threatened as the closely-watched U.S. ISM print comes across the wires," Spivak said.

The euro climbed to $1.3073, its highest since Oct. 23, before paring gains to last trade up 0.4 percent on the day at $1.3038.

Traders said stop-loss orders were triggered on the break of $1.3030, and market players who had previously bet against the euro were squaring their short positions as it moved higher.

There was talk of an options barrier at $1.3050 with some traders expecting sellers around that level.

"Merkel is sounding a bit more flexible and we are getting positioning moves and a bit of flow moves," said Daragh Maher, FX strategist at HSBC.

"But I still think we are in a market where the reflex is to not really like the euro. A number of people have been trying to sell this rally and perhaps getting caught the wrong way, and that's why we are able to push higher."

The euro was helped by Spanish and Italian bond yields falling as investors became more confident about buying euro zone debt, and Greek bonds rallied after the announcement of details of a debt buy-back.

A slightly better-than-expected Spanish manufacturing PMI survey -- on top of signs of quicker Chinese growth -- also strengthened investor appetite to take on risk.

FISCAL CLIFF RISKS

Despite the euro recovering from falls after ratings agency Moody's downgraded the euro zone rescue funds late on Friday , the single currency looked vulnerable to continuing concerns about how the euro zone will deal with its debt crisis and worries about the U.S. "fiscal cliff".

If Congress and Washington cannot reach a deficit reduction deal by the end of the year, massive U.S. government spending cuts and tax rises will be unleashed in early 2013. Many economists believe this "fiscal cliff" has the potential to tip the U.S. economy back into a recession.

Signs policymakers are struggling to reach an agreement to avert that scenario could boost demand for the highly liquid dollar, which is considered a safe haven currency.

"Resolution of the U.S. fiscal cliff still seems some way off, and it is increasingly likely that a comprehensive agreement will be delayed into the new year, meaning the economy may go over the cliff in January only to be hauled back up again soon after," said Simon Hayes, analyst at Barclays Capital.

The dollar last traded flat against the yen at 82.34, retreating from last month's peak of 82.82 yen.

The yen has been under pressure on expectations that a likely change in Japan's government later this month would lead to aggressive monetary easing.

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