FOREX-Euro gets reprieve as Japan to buy euro bonds

* Euro off 4-month low after Japan says to buy euro bonds

* Noda says Japan will use euro cash in reserves

* Portugal under pressure to accept financial aid package

* Euro a sell on rallies, say analysts

(Adds quote, details)

By Anirban Nag

LONDON, Jan 11 (BestGrowthStock) – The euro steadied above a
four-month trough on Tuesday, after Japan said it may buy about
a fifth of the bonds a European rescue fund plans to sell later
this month to finance a bailout scheme for Ireland.

But Finance Minister Yoshihiko Noda suggested Japan would
use its euro cash holdings to buy the bonds, dampening some of
the initial excitement from traders who thought the move might
involve fresh buying of the European currency. [ID:nL3E7CB076].

Japan does not disclose the currency breakdown of its $1
trillion reserves but analysts think only a very small portion
is in the euro and the impact of the news may not last long.

The pledge comes after China assured Spain it would invest
in the indebted euro zone state’s bonds, the impact of which
proved fleeting.

Given mounting unease over a heavy schedule of debt issuance
by southern European countries this week, the euro could easily
resume its downward path, analysts said. Peripheral euro zone
debt spreads over German Bunds widened, reinforcing a view that
investors were looking for a more lasting solution.

“The euro remains a sell on rallies,” said Jeremy Stretch
head of currency strategy at CIBC World Markets.

“The Japanese are not going to recycle other parts of their
reserves into buying euro debt. They want to keep up with the
credit curve by continuing to invest in triple-A debt.”

Spain also plans to issue a 10-year syndicated bond this
month, a Treasury official told Thomson Reuters news and
analysis service IFR on Tuesday, replicating last year’s
issuance pattern.

The euro last traded at $1.2930 (EUR=: ), almost unchanged
from late New York levels, having risen as high as $1.2992
following Noda’s comments. Resistance is at its 200-day moving
average of $1.3072 while support is at $1.2794, the 61.8 percent
retracement of a June-to-November rally.

“News that Japan intends to purchase around 20 percent of
EFSF issuance is not a significant euro-positive in our view,”
said Tom Levinson, currency analyst at ING. “The balance of
risks suggests it can drop to test important support at $1.28.”

The European Union set up the 440 billion euro European
Financial Stability Facility (EFSF) as a safety net for heavily
indebted euro zone nations, and this facility will issue bonds
later this month to support Ireland.

FOCUS ON PORTUGAL

The focus this week is on a Wednesday debt auction that will
signal whether Portugal will be able to afford continuing to
raise funds in the debt market or be forced to turn to the EU
and IMF for financial aid.

Markets have already pushed the 10-year Portuguese yield to
a punishingly high 7.14 percent. The 7 percent mark has been
recently described by Portuguese officials as a threshold of
sorts above which government funding is difficult to sustain.

Bank of Portugal board member Teodora Cardoso said on Monday
that the country would be able to put its debt crisis behind it
more easily if it received international financing, according to
news agency Lusa [ID:nLDE70923Q].

Finance Minister Fernando Teixeira dos Santos said on
Tuesday Portugal has no plans to seek a bailout, and the
government was doing everything possible to avoid doing so.

Italy and Spain are also due to tap the bond market on
Thursday, auctions that will also be closely watched for any
sign of contagion. [ID:nLDE7061KW].

Italy sold short-term treasury bills on Tuesday at yields
that were last seen two years ago, but this had little market
impact. [ID:nLDE70A0S6]

Analysts said the euro could gain once the three bond
auctions were out of the way, though if borrowing costs stayed
high any gains would be temporary as attention would turn to
when a call for outside assistance might come.

“The euro may get see a bounce — a knee-jerk one — if
these auctions see a good bid-to-cover ratio,” CIBC’s Stretch
said. “But success will come at a price.”

The euro climbed on the crosses, rising to 107.50 yen
(EURJPY=R: ) from a four-month low of 106.83 yen set on Monday. It
gained 0.2 percent on the Swiss franc to 1.2530 (EURCHF=R: ).

The dollar index (Read more about the global trade. ) (=USD: ) (.DXY: ), was last at 81.028, up 0.2
percent. The dollar traded at 83.11 yen (JPY=: ), up 0.4 percent
on the day, on Japanese importers’ bids.

The Australian dollar (AUD=D4: ) shed more than 1 percent to
$0.9840, with the news of more floods in the country’s northeast
prompting speculators to take profits. It hit a one-month low of
$0.9820, slipping below trendline support around $0.9856.

(Editing by John Stonestreet)