FOREX-Euro advances versus dollar on EU summit optimism

* EU leaders focus on Portugal at summit this week

* Portuguese instability, Spain bank worries priced in

* Middle East, sovereign accounts lift euro off lows
(Updates prices, adds comment)

By Wanfeng Zhou

NEW YORK, March 24 (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 $1.4213 on trading platform EBS,
and was last up 0.7 percent at $1.4185 (EUR=EBS: Quote, Profile, Research). 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 $1.4053 on EBS
after Moody’s downgraded 30 Spanish banks by one or more
notches, though notably not the biggest players, Santander and
BBVA. See [ID:nLDE72N0B1]

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.

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 selloff in the
currency. [ID:nLDE72M1E6]

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 that the
European Central Bank will raise interest rates next month to
counter inflation pressures. Such a move 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. See
[ID:nN24115372]

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 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 80.88 yen
(JPY=: Quote, Profile, Research). 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.
(Editing by Leslie Adler)

FOREX-Euro advances versus dollar on EU summit optimism