FOREX-Euro gains broadly from progress on Greece, Spain

Wed Dec 5, 2012 3:02pm IST

* Euro hits 7-week high vs dollar as European stocks rise

* Progress on Greece and Spain seen as positive

* Some investors see fiscal cliff as dollar-negative

By Nia Williams

LONDON, Dec 5 (Reuters) - The euro hit a seven-week high against the dollar on Wednesday as efforts to tackle the debt crisis in Greece and subsiding concerns about Spain improved investor appetite for euro zone assets.

Some market players who previously bet against the euro have cut those short positions this week after Greece announced better-than-expected terms for a debt buyback, fueling optimism it will continue to receive international aid and avoid default.

Strategists said the short squeeze higher was likely to run into resistance around the September highs of $1.31729 however, leaving the euro vulnerable to underlying concerns about weak euro zone growth.

The euro rose 0.2 percent to $1.3127, its highest level since Oct. 18. Technical strategists said near-term resistance was expected around the October high of $1.3140.

"We see a combination of improving euro zone sentiment reflected in renewed demand for peripheral bonds and European equities, and a continuing short squeeze on euro crosses," said Valentin Marinov, head of European G10 FX strategy at Citi.

Spanish and Italian bond yields have fallen this week while European stocks have rallied to within sight of 2012 highs. .

Spain formally requested funds to recapitalise its troubled banking sector on Monday, soothing concerns about the resilience of the euro zone's fourth largest economy and helping boost confidence in the euro.

Strategists said some market players also considered uncertainty over whether policymakers can avert the looming U.S. "fiscal cliff" as a reason to sell the dollar in the short-term.

The fiscal cliff is a combination of tax hikes and spending cuts due to kick in early next year that could tip to world's largest economy into recession.

Citi's Marinov said at present concerns about "going over the cliff" seem to be only hitting U.S. stocks, and as a result weighing on the dollar.

But if policymakers struggle to reach a deal before long worries about a global slowdown could intensify, which could spur fresh demand for the highly liquid dollar.

CENTRAL BANKS IN FOCUS

Bets that the U.S. Federal Reserve may unveil a fresh bond purchase scheme to replace its Operation Twist, a programme that will expire this month, at its policy meeting on Dec. 11-12 also weighed on the dollar.

In contrast, the European Central Bank is widely expected to keep rates on hold at its policy meeting on Thursday.

"The Fed is likely to take fresh steps to replace the Operation Twist. Speculation of more aggressive easing in Japan is all over the place, and Australia also cut rates. By default the euro rose," said Makoto Noji, senior strategist at SMBC Nikko Securities.

The euro hit a 7 1/2-month high of 107.96 yen, with investors expecting a more dovish stance from the Bank of Japan if the main opposition party wins a Dec. 16 election as seems likely.

The single currency was last up 0.6 percent at 107.82 yen, while the dollar rose 0.4 percent to 82.22 yen.

The euro also benefited from a selloff in the Swiss franc, rising to a 2-1/2 month high of 1.2154 francs, after Switzerland's largest banks said earlier in the week they would charge fees and pay negative rates on some franc deposits.

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