FOREX-Euro dips as Merkel loss adds to downside risks

* State election loss for Germany’s Merkel dents euro

* Ireland stress tests, Portugal debt are key risks

* Euro bids at $1.4030/10, technical support $1.3998/75

(Adds quote, detail)

By Anirban Nag and Neal Armstrong

LONDON, March 28 (Reuters) – The euro eased on Monday,
heading into a cluster of Asian demand and technical support,
after Germany’s ruling party lost a key state election, while
hawkish comments by Federal Reserve officials lifted the dollar.

The loss by Chancellor Angela Merkel’s conservatives of
Baden-Wuertemberg, which they had held for nearly six decades,
led markets to bet Merkel will have less leeway to shore up
financially stricken members of the single currency bloc.

The higher-yielding Australian dollar (AUD=D4: Quote, Profile, Research), hit a
29-year peak of $1.0315, breaking past option barriers at $1.03.
Recent intervention to weaken the yen and stronger risk appetite
were factors underpinning the Aussie’s rise, traders said.

For the euro, the failure to break through option barriers
near $1.4250 last week saw some paring of speculative long
positions, moving it towards reported Asian central bank bids at
$1.4030/10.

“It is a combination of setbacks to German Chancellor Angela
Merkel’s party and the dollar being lifted by those comments
from Fed officials which led some investors to short the euro,”
said Adam Myers, senior currency strategist at Credit Agricole.

The euro (EUR=: Quote, Profile, Research) was down 0.2 percent to $1.4044, off a 4-1/2
month high of $1.4249 hit last week on EBS. It fell to around
$1.4020 in the Asian session.

Near-term support lies at the 20-day moving average near
$1.40, and trendline support around $1.3975, which is drawn
through the euro’s Jan. 10 low of $1.2860 and March 11 low of
$1.3752.

“Events provide downside risks (for the euro) in our
opinion,” said fx analysts at Barclays Capital in a note.

“These include discussion over bank funding and
recapitalisation in Ireland ahead of the bank stress-test
results (published on 31 March), concerns about Portugal, and
about the impact of potentially waning political support in
Germany for its financial contribution to the euro rescue
package,” said fx analysts at Barclays in a note.

The euro had been due for a pull-back, and the dollar for a
bounce, judging from market positioning. Latest data from the
Commodity Futures Trading Commission shows speculators raised
the value of dollar net short positions to $29.82 billion in the
week ended March 22, up from $27.07 billion. [IMM/FX]

DOLLAR MOVING UP

Sunday’s election loss to the Greens, who surged to their
first premiership in Baden-Wuerttemberg, was the second defeat
for Merkel’s Christian Democrats in states usually regarded as
strongholds for the party. [ID:nLDE72Q0E6]

The defeat was blamed on Merkel’s reversal of nuclear policy
following Japan’s nuclear crisis and foreign policy issues, but
could cast doubt on whether Merkel’s policy on Europe has the
support of the German people.

Losses in the currency are likely to be limited, however,
with the European Central Bank still expected to raise rates
next month. ECB President Jean-Claude Trichet speaks at 1300 GMT
and is likely to reiterate his hawkish stance towards inflation.

The dollar meanwhile held on to Friday’s gains sparked by
hawkish comments from regional Fed officials Charles Plosser and
James Bullard. [ID:nLDE72O009][ID:nLDE72O1T3]

“Comments from Bullard, who is a cheerleader for
quantitative easing, shows a sea-change as to whether the
endgame for QE2 is approaching,” said Jeremy Stretch, head of
currency strategy at CIBC.

“If we get reasonably supportive ISM manufacturing data and
U.S. payrolls this week, we could see the dollar index testing
its 50-day moving average.”

The dollar index edged up 0.2 percent to 76.348 (.DXY: Quote, Profile, Research),
pulling away from a 15-month low of 75.340 set on March 21. Its
50-day moving average comes in at 77.285 on Monday.

The dollar was up 0.5 percent at 81.70 yen with implied
volatilities staying low, which traders said was ruling out the
need for any further official yen selling intervention in the
near-term.

One-month dollar/yen vol traded around 10 percent (JPY1MO=: Quote, Profile, Research),
compared to around 20 percent when the yen rose to a record high
of 76.25 earlier this month.

(Editing by Patrick Graham)

FOREX-Euro dips as Merkel loss adds to downside risks