FOREX-Euro slips versus dollar, but upward trend intact

Tue Jan 29, 2013 6:44pm IST

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* Euro slips from 11-month high on profit-taking

* Euro fall to be short-lived as many to buy back on dips

* Dollar slips vs yen but strengthening trend intact

* Wednesday loan repayment to ECB, Fed meeting in focus

By Anooja Debnath

LONDON, Jan 29 (Reuters) - The euro slipped for a second straight day against the dollar on Tuesday, although it was not far from recent 11-month highs with its overall strength intact on growing confidence about a euro zone recovery.

Receding fears around the euro zone crisis have pushed investors to opt for the euro, and such dips were good buying opportunities, analysts said.

Profit taking and pull-back in the euro would be short-lived, traders said, as it looked poised to extend gains to $1.3500 in coming days. But before getting to that, it would face strong resistance at the 2012 high of $1.34869.

The euro was down 0.2 percent on the day against the dollar at $1.3435 having fallen from Friday's high of $1.3480, which was the highest level since late February last year. Traders reported bids from Asian sovereign investors at $1.3420-30.

"The trend in euro/dollar is still very much upwards, and I think the market is desperate for a pullback to get a bit more animated about a test of the topside," said Daragh Maher, FX strategist at HSBC.

"There has been a substantial reduction in the tail risks (surrounding the euro zone) and the euro has got momentum."

Maher said if the euro broke through $1.34869 and the psychologically important level of $1.35, the next big target would be the July 2011 low around $1.3840.

The euro has risen 1.8 percent against the dollar and over 4 percent against the yen since the start of 2013 on optimism that the worst of the euro zone crisis is over.

It was boosted late last week on news Europe's banks would repay some of their three-year loans from the European Central Bank early, indicating parts of the region's banking system were stabilising.

Analysts said the euro could likely get a slight lift from this as it effectively means removing a large chunk of the 600 billion euros of 'excess liquidity' from the market.

Analysts added that the outcome of the U.S. Federal Reserve's monetary policy meeting on Wednesday could help the euro trend higher, although most do not expect any change in the Fed's stance.

"If you get the Fed repeating its framework (of pumping in stimulus) it will be dollar negative and if nothing goes wrong in the euro zone, the euro could break above $1.35-$1.36," said Chris Turner, head of FX strategy at ING.

The Fed's policy statement will be issued at the close of its two-day meeting on Wednesday.

YEN RECOVERY FLEETING

The dollar dropped against the yen slipping further away from a 2-1/2 year high hit a day earlier, but analysts said yen weakness will resume as investors look to buy the dollar back at lower levels.

Traders cited demand for 6-month yen puts - bets the currency would fall - from a U.S. investor who bet dollar/yen would rise to 97 yen in six months through option strikes.

The dollar slipped 0.4 percent to 90.45 yen, down from Monday's high of 91.26 yen, its strongest level since June 2010. Traders reported options barriers at 91.50 and 92 yen.

Selling the yen has been mostly a one-way trade since mid-November, based on expectations that Japanese Prime Minister Shinzo Abe would push the Bank of Japan into more forceful monetary easing to beat deflation.

"Should there to be any correction down to 88 yen, it would be a good buy area. The overall trend (for dollar/yen) will be higher, particularly in March-April when we start discussing the new BOJ governor," ING's Turner said.

Present BOJ Governor Masaaki Shirakawa, whose term ends in April, is seen likely to be replaced with a more dovish governor, who could then bring forward any easing, giving further impetus to yen bears.

The euro also slipped against the yen, dropping 0.6 percent to 121.49 yen. It stayed below Monday's high of 122.91 yen, the euro's strongest level against the Japanese currency since April 2011.

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