EU summit optimism pushes euro higher vs dollar

NEW YORK (Reuters) – The euro rose against the U.S. dollar on Thursday on optimism European policymakers will be able to control a political and debt crisis in Portugal, though technical resistance could cap near-term upside.

The fall of the Portuguese government following the resignation of its prime minister is expected to dominate a summit of EU leaders on Thursday and Friday, with Lisbon under intense pressure to seek a bailout package.

The euro remained resilient, rising above $1.42 as traders said most of the selling on concerns about Portugal had already occurred. Still, upside for the euro looks limited, given option barriers around $1.4250 and strong resistance near $1.4280, the November high.

“The Portugal story was pretty much priced in,” said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston. “Given the rapid events in Portugal and the fall of the government, there might be something that comes out of the summit today and tomorrow.”

The euro rose as high as $1.42206 on trading platform EBS and was last up 0.6 percent at $1.41717. Traders noted semi-official and Middle Eastern bids around the day’s lows and macro account demand. Offers were seen around $1.4220.

The single currency had earlier hit a low of $1.40534 on EBS after Moody’s downgraded 30 Spanish banks by one or more notches, though notably not the biggest players, Santander and BBVA.

Portuguese Prime Minister Jose Socrates resigned on Wednesday after parliament rejected his government’s latest austerity measures aimed at avoiding EU financial assistance.

Socrates remains adamantly opposed to requesting aid from the European Union and the International Monetary Fund and has made it clear he intends to hold that line, at least until a new Portuguese government is formed in the weeks ahead. Lisbon needs to refinance 4.5 billion euros of sovereign debt in April, which could trigger a request for aid.

Fitch on Thursday cut Portugal’s credit ratings by two notches, saying risks to the country’s financing rose after parliament failed to pass fiscal consolidation measures and the prime minister resigned.

European leaders are unlikely to take a decision on how to strengthen the euro zone’s bailout fund at this week’s summit, delaying the process until June. Traders said the development is mildly negative, but unlikely to spark a sell-off in the currency.

Danske Bank recommends buying the euro, targeting $1.46. It said negative factors were not enough to trigger a trend reversal “as the support from relative monetary policy and global macro data remains very strong.”

YIELD SUPPORT

The euro was also supported by expectations the European Central Bank will raise interest rates next month to counter inflation pressures.

That would further move the yield differential in favor of the euro, as the U.S. Federal Reserve last week reiterated its pledge to keep interest rates — now at virtually zero — at very low levels for an extended period.

Data on Thursday showed new orders for long-lasting U.S. manufactured goods fell in February, hinting at some unexpected softness in manufacturing and business investment plans.

The Federal Reserve is “still very cautious, and the latest numbers do indicate that it’s still a time to just wait and see how the economic data come in,” said BNY Mellon’s Shankar.

Some in the market question the ECB’s intent to tighten monetary policy at a time when some euro-zone economies are suffering, an issue that may haunt the euro in the future.

“I find it very, very hard for them to hike interest rates at this point, simply because of what we’re seeing in those outside economies,” said Greg Salvaggio, senior vice president of capital markets at Tempus Consulting in Washington. “I think they will continue the hawkish rhetoric, but I don’t think they’re going to move yet.”

Against the yen, the dollar was little changed at 80.97 yen. Market players remained wary that Japan may intervene further if the dollar drops below 80 yen, especially if such a move occurs in volatile trade.

(Reporting by Nick Olivari and Wanfeng Zhou; Editing by Dan Grebler)

EU summit optimism pushes euro higher vs dollar