June 19, 2012 / 8:40 PM / in 8 years

FOREX-Euro gains vs US dollar as Fed decision awaited

* Growing optimism that Greece can renegotiate bailout terms
    * Fed expected to opt for more stimulus
    * Australian dollar rises to 6-week high vs dollar

    By Wanfeng Zhou
    NEW YORK, June 19 (Reuters) - The euro rallied against the
U.S. dollar and Japanese yen on Tuesday, buoyed by positive news
out of Greece and as a run-up in Wall Street stocks encouraged
investors to take on riskier positions.
    Traders scrambled to cover bets against the euro as fears of
Greece exiting the euro zone receded following a weekend victory
for pro-bailout parties. Greek parties holding talks to form a
government are likely to strike a deal by Wednesday, said
Socialist leader Evangelos Venizelos. 
    Adding to the positive sentiment, international lenders and
Greece will renegotiate the program on which the second
financial bailout for Athens is based because the original has
become outdated, a senior euro zone official said. 
    Strategists said the euro would struggle to rally beyond the
one-month high of $1.2748 posted on Monday, given worries about
Spain's banking system and the euro zone's dire economic
    "Essentially, this is an adjustment process from a severely
short risk position that was in place going into last weekend,"
said Michael Woolfolk, senior currency strategist at BNY Mellon
in New York.
    The euro rose 0.9 percent to $1.2683 after hitting a
session high of $1.2730 on Reuters data, partly helped by demand
in the Middle East.
    Support is seen around $1.2536, the trendline drawn below
daily lows from June 1, and the 21-day moving average around
    It trimmed gains after a German government official said
there was no discussion at a Group of 20 leaders summit in
Mexico this week about using Europe's rescue funds to buy up the
bonds of stricken members of the euro zone. 
    British media reports earlier said German Chancellor Angela
Merkel was poised to use Europe's dual bailout funds, known as
the EFSF and ESM, to buy up the debt of countries like Italy and
Spain, and had discussed such plans at the summit. 
    News that a second, more detailed audit of Spanish banks
would be delayed until September fuelled more bearishness toward
Spain, the euro zone's fourth-largest economy, whose 10-year
borrowing costs have ballooned above 7 percent.  
    Spain's Treasury sold 12- and 18-month debt on Tuesday at
yields of over 5 percent, compared with just under 3 percent at
the last auction for the same maturities in May. It is to sell
between 1 billion and 2 billion euros of bonds on Thursday.
    "We believe sustained high yields will eventually force
Spain into taking a full-fledged bailout," wrote Brown Brothers
Harriman in a note, adding that the delay in the results of
Spain's banking sector audit would not sit well with investors.
"The market simply does not have this kind of patience." 
    Against the yen, the euro was up 0.6 percent at 100.14
. The dollar slipped 0.2 percent to 78.93 yen.
    Hopes that the Federal Reserve's policymakers will agree on
extending stimulus measures fueled a rally in stocks and
undermined the safe-haven appeal of the U.S. dollar.
    The Fed will announce its policy decision Wednesday
afternoon and speculation is rising it could opt for a third
round of so-called quantitative easing as Europe's troubles pose
a risk to growth in the United States.
    Many analysts expect the Fed to extend its long-term
bond-buying through "Operation Twist" by a few months from the
current deadline of June.
    "There is positioning ahead of the Fed, with the dollar
unable to capitalize on euro-negative sentiment ahead of the
Fed," said Omer Esiner, chief market analyst at Commonwealth
Foreign Exchange in Washington. "The risk is relatively high
that officials will signal the need for more stimulus."       
    Another round of easing would weigh on the U.S. dollar and
boost growth-linked currencies like the Australian dollar.
    The Australian dollar jumped to a six-week high of
1.0202. It was last trading up 0.6 percent at $1.0185.
    The dollar index, which measures the greenback
against a basket of major currencies, was down 0.7 percent at
81.388, having struck a one-month low of 81.266 on Monday.
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