July 2, 2012 / 10:56 AM / 6 years ago

FOREX-Euro falls as doubts over EU deal creep in

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

    By Anirban Nag
    LONDON, July 2 (Reuters) - The euro fell against the dollar
on Monday, after fiscally strong Finland and the Netherlands
opposed a plan for the euro zone's 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 stabilise 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. Traders said the euro was likely to
stay under pressure ahead of an European Central Bank meeting
this week, when the bank is expected to ease policy.
    The euro fell to $1.2630 from around $1.2658 before
the comments from Helsinki. The Finnish government said 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 euro has come off on those comments. It serves a
reminder that Friday's deal was long on promises and short of
action," said Geoff Kendrick, currency analyst at Nomura.
    "I am short euro/dollar after Friday's deal and happy with
that trade. The markets are expecting the ECB to cut rates and
announce fresh measures to support the economy. If those
measures do not materialise, the euro will be sold off."
    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.
    So 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 euro was last trading at $1.2617, down 0.3 percent on
the day. Traders said there were supporting bids from Asian
investors at around $1.2590-95 while decent resistance lay at
$1.2693, the high struck on Friday.
    The single currency fell 0.6 percent against the yen to
100.41 yen. On Friday, the euro had jumped 2.2
percent versus the yen, its biggest one-day rise since March
2011. Th e re was talk of profit-taking in the euro against the
yen by hedge funds, traders said.
    The euro surged around 1.7 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 authorised 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
towards 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.
    "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 0.2 percent at
US$1.0255, having hit a two-month high of $1.0279.
    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 79.58 yen, staying
below a two-month high of 80.63 yen hit a week ago.
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