FOREX-Euro falls vs dollar as U.S. factory orders rise

* Strong U.S. factory orders boost dollar

* No strong case to buy euros, hedge fund manager says

* Aussie dollar sinks as floods weigh
(Recasts, updates prices, adds comment, U.S. data)

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 4 (BestGrowthStock) – The euro slid from three-week
highs against the dollar on Tuesday, weighed down by
unexpectedly strong U.S. factory numbers, with further pressure
likely given doubts over the euro area’s bond issuance.

Data showed new orders received by U.S. factories rose in
November and orders excluding transportation recorded their
largest gain in eight months, fueling dollar buying versus the
euro. For U.S. data see [ID:nN03158039].

The weakness in commodities has also undermined the euro,
which in recent months has moved in tandem with the sector as
global risk appetite improved.

Traders also said the lapse of the New York expiry in
euro/dollar, where there are reportedly option-related bids in
the $1.3400 region, contributed to the euro zone single
currency’s retreat. Those vanilla bids in the euro had kept the
euro partly supported throughout the Asian and London session.

“There’s always a bearish case for the euro because of the
debt situation. That will keep coming back so it’s unclear to
me … the upside for owning the euro in a big way,” said Aston
Chan, portfolio manager at global macro hedge fund GLC in
London. GLC has assets under management of $1.2 billion.

In midday New York trading, the euro was down 0.3 percent
from late on Monday at $1.3306 (EUR=EBS: ) after hitting
three-week peaks at $1.3435. More support lies at $1.3280 and
$1.3250, Monday’s lows, traders said. A fall below key support
at $1.3250 could prompt more selling in the euro as traders
target the 200-day moving average just below $1.3100.

The euro was supported earlier by the overall improvement
in the global industrial cycle. The euro area purchasing
managers’ index (PMI) for December was revised upward on
Monday, suggesting a pick-up in the region’s growth momentum.

Against the yen, the euro reversed gains to trade slightly
lower on the day at 109.18 (EURJPY=R: ).

Despite the increase in risk appetite, volatility in major
currencies is still elevated, suggesting investors in the
options market remained nervous about global growth prospects.
For instance, one-month euro/dollar implied volatility on
Monday hit a one-month high at 14.00 percent (EUR1MO=: ),
although on Tuesday, it slipped a bit to 13.25.

At the same time, back-end vols in euro/dollar have
remained firm and continue to trade with a premium over the
short end of the curve.

“Our base case remains focused on the risk of a sharp fall
in the euro over the coming year, reflecting the ongoing fiscal
struggles in the euro zone periphery and the need for the
exchange rate to provide some offset for the overall adjustment
process,” wrote TD Securities in a research note.

In the next two months an estimated 150-200 billion euros
of government bonds are scheduled to be issued by euro zone
countries, some of whom are struggling with rising budget
deficits and higher borrowing costs. That should further cloud
prospects for the euro.

TD added that euro/dollar gains are liable to remain
limited to the $1.3450 area in the short run, not far from the
highs seen in December.

Meanwhile, currency investors remained riveted on the
Australian dollar, which fell as severe floods in north-east
Australia are expected to impact coal production, a major
contributor to its economy.

The Aussie dollar fell 1.1 percent to US$1.0055 (AUD=D4: ),
retreating from a 28-year peak around US$1.0257 set on Friday.
Traders said funds sold Aussie for euros, taking profit on long
Aussie positions taken in the run-up to the end of 2010.

The dollar rose 0.3 percent to 81.92 yen (JPY=: ) with
traders seeing offers around 82.50 and near-term resistance at
the 55-day moving average of 82.60.

Positive U.S. economic reports such as data on Monday
showing manufacturing grew at its fastest clip in seven months
in December and construction spending hit a five-month high in
November helped fuel a rally in dollar/yen.

For Tuesday afternoon, markets are awaiting minutes of the
Federal Open Market Committee’s Dec. 14 meeting.
(Editing by James Dalgleish)

FOREX-Euro falls vs dollar as U.S. factory orders rise