July 2, 2012 / 12:38 PM / 5 years ago

FOREX-Euro down vs dollar and yen; doubts over EU deal

* Euro down vs dollar after surge on Friday
    * Market players start to question EU summit deal
    * PMI data confirms euro zone manufacturing slowdown

    NEW YORK, July 2 (Reuters) - The euro slipped against the
dollar o n Monday, after fiscally strong Finland and the
Netherlands opposed a plan for the euro zone's permanent bailout
fund to buy government bonds in the secondary market.
    That injected fresh uncertainty over last week's summit deal
to tackle the debt crisis in which European leaders decided that
rescue funds would be available to stabilize bond markets.
    That, along with moves towards a common banking union, had
triggered the euro's biggest single-day percentage rise in eight
months against the dollar on F riday. 
    Even amid those gains however, traders had cautioned the
euro was likely to stay under pressure ahead of a European
Central Bank meeting this week, when the bank is expected to
ease policy. 
    U.S. markets will be closed on Wednesday for the U.S.
Independence Day holiday which may also lower liquidity the day
before the ECB meeting. 
    But as New York trading begain on Monday investor sentiment
was dominated by the Finnish government saying that the rescue
fund's bond buying from secondary markets would require
unanimity and that seems unlikely because both Finland and the
Netherlands are opposed. 
    "The juxtaposition of a holiday-broken week in the U.S. with
the amount of economic information we are going to receive this
week is making risk taking extremely dangerous," said Brad
Bechtel, managing director at Faros Trading in Stamford,
    "The tape bombs out of Europe that are likely to persist, as
always, will make things even worse," Bechtel said. "Already
last night we had the Finnish and Dutch on the wires reiterating
that ESM bond buying will be decided on a case by case basis,
underlying their negative view on bond buying generally." 
    The euro was last trading at $1.2588, down 0.6 percent on
the day. 
    The ECB is expected to cut its main refinancing rate by 25
basis points to 0.75 percent o n Thursday, with expectations that
the deposit rate it pays banks to park cash overnight may also
be cut, to zero. 
    Some players are hoping the ECB will also announce fresh
stimulus measures to shore up the faltering euro zone economy.
The market will be disappointed if the ECB fails to deliver on
those expectations, analysts said.
    Data on Monday showed euro zone manufacturing suffered in
June and jobs were cut at the fastest rate in two-and-a-half
    The single currency fell 0.5 percent against the yen to
100.50 yen. On Friday, the euro posted its biggest
one-day rise against the yen since March 2011. T h ere was talk of
profit-taking in the euro against the yen by hedge funds,
traders said.
    The euro surged around 1.8 percent against the dollar on
Friday, after leaders agreed to let Europe's rescue fund inject
aid directly into stricken banks from next year and intervene on
bond markets to support troubled member states.
    But details were sketchy and questions remained whether,
even if authorized by member states to do so, the rescue fund
would have enough money to provide a firewall from a debt
contagion that could ensnare larger peripheral economies. 
    Many market players said the euro's rally could fade,
especially if peripheral bond yields started to climb back
toward recent euro-era highs. Italian and Spanish 10-year yields
slipped on Monday but their funding costs remain high in
historical terms.
    "The optimism will fade as the week unfolds and if yields in
Italy and Spain increase there will be further pressure on
euro/dollar," said Lutz Karpowitz, FX strategist at Commerzbank
in London.
    "It (the deal) is just spending more money from donor
countries and receiving more money from debt-ridden countries.
This will lead to political friction and is not a long-term
    Growth-linked currencies recovered from data on Sunday
showing Chinese factory activity slowed to seven-month lows in
June, with the outcome not as bad as feared..
Th e Australian dollar was last up 0.1 percent at
US$1.0244, having hit a two-month high earlier in the session.
    The yen showed little reaction to news that Japanese
political heavyweight Ichiro Ozawa and 51 other lawmakers will
quit the ruling party over a plan to increase sales
    The government will still retain its majority in the
powerful lower house of parliament and the currency appeared to
shrug off concerns over political uncertainty.
    The dollar was last little changed 79.81 yen, staying
below a two-month high of 80.59 yen hit a week ago.

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