Euro off 4-year lows, but bounce maybe shortlived

By Anirban Nag

SYDNEY (BestGrowthStock) – The euro held above four-year lows on Thursday, as its latest bounce led to short covering by investors, although sentiment was fragile with many fretting over policy disarray in the euro zone.

In Asian trade, the euro was steady $1.2390, having risen to as high as $1.2429 in early deals. It gained more than 1.7 percent on Wednesday, notching its best one-day gain in more than a year.

The euro had rebounded from a four-year low of $1.2143 on speculation European monetary officials might move to check its rapid fall. A European Central Bank spokesman, however, declined to comment on market rumors of fresh central bank action.

The last time a major coordinated effort was made to intervene was in September 2000 when the Federal Reserve, Bank of England, Bank of Japan, and Bank of Canada joined forces with the ECB to support a beleaguered euro. At that time, the euro hit a trough below US$0.85.

The euro was also supported by speculation that the Swiss National Bank had intervened to curb the franc’s strength against the single currency in recent sessions.

Still, traders remained sceptical of the euro’s latest bounce, with many expecting near-term resistance at around $1.2445, its May 18 high. Investors were also worried about increased uncertainty over market regulation in the euro zone.

A day after Germany banned restricted selling in euro zone bonds, CDS and bank shares, cracks appeared in the euro zone with many European governments caught wrong footed by Berlin’s unilateral action. It suggested Europe was unable to form a united front in addressing its debt crisis.

The single currency has lost more than 13 percent against the dollar so far this year, hammered by the Greek debt crisis.

“The euro’s bounce seems like a sucker’s rally,” Matthew Strauss, senior currency analyst at RBC Capital wrote in a note. “Technically, a bounce in the euro was long overdue with daily valuations extremely oversold, net short euro positioning also at extremes and euro 25 delta risk reversals at record levels.”

Euro/dollar one-month risk reversals, a measure of currency sentiment, showed an extreme bias for puts.

The euro’s bounce and dovish minutes from the U.S. Federal Reserve’s latest monetary policy meeting saw the dollar index (Read more about the global trade. ) (.DXY: ) fall to 86.29, retreating from a 14-month high of 87.46.

The Fed’s minutes indicated no hints of imminent tightening, despite upward revision to growth forecasts.

Dollar/yen pared some its losses against the yen, inching higher to 91.68 yen from 91.52 yen late in New York, although traders said the yen was likely to be supported on anxiety about more regulatory curbs following Germany’s move.

Traders fear regulators could target leveraged carry trades next. The yen usually gains during heightened uncertainty and risk aversion.

As a result, outlook for high-yielding currencies was looking pretty grim. Aussie climbed to $0.8472, having fallen to a fresh-month low of $0.8355 on Wednesday, but has lost more than 4 percent this week. Against the yen, the Aussie has shed more than 4 yen this week.

Investment Analysis

(Editing by Ed Davies)

Euro off 4-year lows, but bounce maybe shortlived