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FOREX-Euro, dollar fall after U.S. factory data
July 2, 2012 / 9:36 PM / 5 years ago

FOREX-Euro, dollar fall after U.S. factory data

* Euro gains from Friday surge vs USD cut back
    * US manufacturing report increases risk aversion in NY
    * Market players start to question EU summit deal

    NEW YORK, July 2 (Reuters) - The euro fell against the U.S.
dollar o n M onday while the greenback fell versus the yen as risk
aversion increased after  data showing U.S. manufacturing
contracted in June for the first time since July 2009. 
    The data was another sign the U.S. economic recovery is
    "Global markets reacted more strongly than expected to this
tertiary release, suggesting sensitivity to downside U.S.
economic surprises," Michael Woolfolk, senior currency
strategist at BNY Mellon in New York, wrote to clients.
    Uncertainty over the outlook for a deal to stabilize euro
zone debt markets also troubled investors. Finland and the
Netherlands opposed the use of the euro zone's permanent bailout
fund to buy government bonds in the secondary markets. 
    The stance of the two countries countered positive sentiment
from last week's summit deal in which European leaders decided
that rescue funds would be available to stabilize bond markets.
    The dollar dropped 0.31 percent against the yen to 79.52 yen
after falling as low as 79.29 yen after the U.S. data.
The euro traded at $1.2581, down 0.61 percent, after
falling as low as $1.2567 after the U.S. data.
    Finland and the Netherlands opposed the rescue fund's bond
buying in secondary markets, casting doubt on prospects for the
plan and hurting the euro. 
    Brad Bechtel, managing director at Faros Trading in
Stamford, Connecticut, warned that the negative news headlines
out of Europe are likely to persist, keeping uncertainty levels
high and markets jittery. This kind of situation "as always,
will make things even worse," he said.
    Europe will remain in the spotlight with the European
Central Bank expected to ease policy at a meeting this week.
    The ECB is expected to cut its main refinancing rate by 25
basis points to 0.75 percent on 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.
    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.  
   "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 Bechtel. 
    Monday's trading was in sharp contrast to Friday, when the 
euro surged around 1.8 percent against the dollar 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 start to climb back toward
recent euro-era highs. Italian and Spanish 10-year yields
slipped on Mon day 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
    The single currency lost just under 1 percent against the
yen to 100.04 yen. On Friday, the euro posted its
biggest one-day rise against the yen since March 2011. There was
talk of profit-taking in the euro against the yen by hedge
funds, traders said.

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