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Euro loses steam on Fitch, eyes verdict from Athens

SAMAA | - Posted: Jun 21, 2011 | Last Updated: 11 years ago
Posted: Jun 21, 2011 | Last Updated: 11 years ago

TOKYO: The euro clung to small gains on Tuesday as market players bet the euro zone will cobble together a plan to prevent Greece from defaulting on its debt, though its advance could stall ahead of a confidence vote on the government in the Greek parliament.The euro was lifted by short-covering after Klaus Regling, chief of the European Financial Stability Facility, said on Monday that the bailout fund's guarantees would be raised to 780 billion euro from the 440 billion that has just been rubber stamped by ministers.”In the big scheme of things, market players are starting to believe that euro zone policymakers, especially German policymakers, will try to avoid a hard landing in Greece,” said Makoto Noji, senior strategist at SMBC Nikko Securities.The euro was up 0.2 percent at $1.4332 , having risen as high as $1.4385 as short-term players tried to trigger stop-loss orders scattered around $1.4350, and extending its recovery from a three-week low of $1.4073 hit last Thursday.”It's all driven by short-term players. No one is buying the euro to hold it for a long time,” said Tsutomu Soma, manager of foreign bonds at Okasan Securities.The euro pared gains after Fitch Ratings said it would regard both a Greece sovereign debt swap and a rollover of maturities, even a voluntary one, as default.But the impact was partly mitigated as the ratings agency also said it would review its rating on the United States if Congress does not agree to raise the country's debt ceiling by Aug. 2, when the U.S. Treasury has warned it may not be able to borrow more.The euro's recovery started after leaders of Germany and France, long at odds over how to involve private holders of Greek bonds in a new rescue package for Athens, agreed last week on a mild solution favoured by Paris and the European Central Bank, thereby reducing investor fears of an immediate default by Greece.The euro's next resistance is seen at its 55-day moving average of $1.4413 and its June 15 high of $1.4451.”Risk takers may come back to the euro, considering that the Federal Reserve is nowhere near an exit from its easy policy, in contrast to the ECB, which has indicated that it will raise rates despite debt problems,” SMBC Nikko's Noji added.The U.S. central bank will start a two-day policy meeting, its first since U.S. economic data started to take on a decisively weaker tone around a month ago. As the euro recovered, the dollar index lapsed to 74.823, from a top of 75.472.The euro's higher interest rates have been the main driver of the euro's strength this year.”The basic stance of many market players is that they go long on the euro to earn higher interest rates and get away from the euro just when the risk from the debt problems seems large enough,” said Seiya Nakajima, chief economist at Itochu Corp.One wild card for the euro at the moment is the confidence vote in Greece, slated to take place on Tuesday.”The market thinks the confidence vote will pass. Still, should it fail, the euro will be dumped massively, so it is hard to take large risks now,” said a trader at a Japanese brokerage.But some market players are already going long on the euro on hopes that the vote will pass, traders said.Another hurdle, if the vote is passed, will be the Greek parliament's vote on new austerity measures on June 28.Euro zone finance ministers gave Greece two weeks from Monday to approve further spending cuts and tax rises in exchange for another 12 billion euro in emergency loans, piling pressure on Athens to get its ragged finances in order.In the option market, one-month risk reversals were trading around 2.8 percent in favour of euro puts near their highest level since the euro zone's debt problems reached crisis point in May-June 2010, in a sign of continued wariness about the euro's downside risks.Implied volatility on one-month euro/dollar options stood above 13 percent, off its high around 14 percent last week but still way above around 11 percent early this month.The euro had less luck with the Swiss franc, falling 0.2 percent to 1.2085 franc , though it kept some distance from a record low of 1.1946 hit last week.The dollar moved little against the Japanese yen at 80.22 yen .The Aussie fell 0.3 percent to $1.0555 after the minutes of the Reserve Bank of Australia's June meeting showed the bank thinks recent data has not added any urgency to the need for tightening.The Aussie slipped against the yen to 84.55 yen , edging closer to a three-month low of 84.10 yen hit on Monday, with possible support seen at its 200-day moving average at 83.43 yen. AGENCIES

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