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FOREX-Euro slips as EU summit optimism wanes
July 2, 2012 / 8:36 AM / 5 years ago

FOREX-Euro slips as EU summit optimism wanes

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

    By Nia Williams
    LONDON, July 2 (Reuters) - The euro dipped against the
dollar on Monday, giving up some ground after staging its
biggest one-day rally in eight months last week, as initial
euphoria sparked by a summit deal to tackle the euro zone crisis
lost some of its lustre.
    The common currency surged around 1.7 percent on Friday, its
biggest one-day percentage gain since last October, 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.
    The EU leaders also took a step towards banking union by
pledging to create a single banking supervisor. 
    While some market players said the euro's rally may continue
for a while longer, others questioned its sustainability,
especially if peripheral bond yields start to climb back towards
recent euro-era highs.
    "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.
    "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 euro fell 0.2 percent to $1.2632, down from a
one-week high of $1.2693 hit on trading platform EBS on Friday.
Market players cited supporting bids from Asian investors around
    The common currency slipped 0.4 percent against the yen to
100.55 yen. On Friday the euro had jumped 2.2 percent
versus the yen, its biggest one-day rise since March 2011. T h ere
was talk of profit-taking in the euro against the yen by hedge
funds, traders said.
    JP Morgan analysts noted that in previous weeks, a
market-friendly election result in Greece and a bailout for
Spanish banks provided less than a day's worth of rally for
riskier assets including the euro.
    "This one should last a bit longer, as it achieved a lot
more, but will likely over the next month run into resistance
from weak economic data and some back-sliding on the EMU summit
as officials haggle over the details," they wrote in a note.
    Euro zone manufacturing suffered in June and jobs were cut
at the fastest rate in two-and-a-half years, PMI surveys showed
on Monday. 
    The gloomy data added to expectations the European Central
Banks will cut interest rates on Thursday, a move that could
weigh on the euro. A Reuters survey showed market expectations
were for a 25 basis point cut to 0.75 percent. 
    "If we see a rate cut on Thursday it will certainly be
euro-negative in my view," said Gareth Berry, associate director
of G10 FX strategy for UBS in Singapore, who expected the euro
to trade at $1.15 by the end of the year. 
    Investors who trade using models based on interest rate
differentials would likely spring into action, he said.
    "They will be extremely active in the immediate aftermath of
a rate cut and we'd expect them to be heavy euro sellers."
    Commodity 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.   
    The Australian dollar was last up 0.1 percent at
US$1.0240, holding gains made on Friday when it surged 2.1
percent for its biggest one-day jump in seven months.    
    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 dipped 0.2 percent to 79.62 yen, staying
below a two-month high of 80.63 yen hit a week ago.

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