FOREX-Aussie steadies after China rate move; euro edges up

* Aussie dlr steadies as China rate move largely priced in

* Robust Chinese economy should underpin Aussie into 2011

* Euro edges higher in quiet, holiday-thinned trade

By Neal Armstrong

LONDON, Dec 27 (BestGrowthStock) – The Australian dollar steadied on
Monday, paring losses made after China’s central bank raised
rates at the weekend in a move seen largely priced in, while
other major currency pairs held tight ranges in quiet trade.

The euro inched higher against the dollar in low volume
trading with London markets shut on Monday and Tuesday and
liquidity expected to be at a premium until the new year.

While the market had been expecting Beijing to tighten
further, the timing was a surprise as there had been doubts
whether it would raise rates before the end of the year.

Saturday’s move by the Chinese central bank to raise
interest rates was the second in just over two months,
underscoring its desire to dampen domestic demand and get price
pressures under control.

Australia has benefited from strong Chinese demand for iron
ore and other commodities.

“There was a knee-jerk sell-off in the Aussie but investors
knew this China move was coming eventually. Providing the
Chinese data holds up in 2011, the Aussie should stay
supported,” said Geoffrey Yu, currency strategist at UBS.

The news knocked the Australian dollar as low as $0.9987
(AUD=D4: ) in Asia but it recouped its losses to trade flat in
European trade at $1.0035, not far from a six-week high of
$1.0067 hit last Thursday.

“The pace of (China) rate hikes has so far been relatively
aggressive. Nonetheless, we still expect only three rate hikes
next year and they will probably be frontloaded in H1 2011. We
expect the PBoC to be on hold through most of H2 2011 as
inflation again starts to ease,” said analysts at Danske Bank in
a note to clients.


The euro (EUR=: ) was up around 0.3 percent versus the dollar
at $1.3158, holding above a three-week low of $1.3055 hit last
week, but clouded by worries over debt refinancing requirements
of countries such as Spain and Portugal into the new year.

Markets have put Spain’s debt issuance plans under
particular scrutiny since Ireland applied for a bailout, forcing
up the Spanish government’s borrowing costs.

Technical analysts said the outlook was brighter for the
single currency while it held above its 200-day moving average
at $1.3087.

The dollar slipped slightly against the Japanese yen,
touching a three-week low of 82.66 yen (JPY=: ). It was last at
82.82, close to unchanged for the day.

Although stuck in a range of 82.50 to 84.50 yen, the dollar
has been ticking down in the past couple of weeks as holders of
long positions have given up hopes of pushing it beyond 85 yen.

“A sharp rise in U.S. bond yields earlier this month has
prompted many traders to bet on a rise in the dollar. But as the
dollar was unable to extend gains, traders have been cutting
long positions,” said Katsunori Kitakura, chief dealer at Chuo
Mitsui Trust Bank.

The dollar/yen rate has had a high correlation with U.S.
bond yields, particularly for two-year notes, but the
relationship has weakened this month.

Last week it broke down as the two-year U.S. yield rose more
than 5 basis points while the dollar fell 1 yen.

But many traders attribute that to illiquid year-end market
conditions and expect the correlation to return when market
players are back from holiday.

An auction of $35 billion in two-year U.S. Treasuries later
in the day will be closely watched for clues on where U.S. bond
yields may be headed after a volatile month in the bond market.

(Additional reporting by Hideyuki Sano, editing by Stephen

FOREX-Aussie steadies after China rate move; euro edges up