FOREX-Euro gets respite as yield spreads tighten

* Euro rises, broad selling momentum cools for now

* Yield spreads for Portugal, Spain vs Germany tighten

* Focus on ECB meet, liquidity ops, possible bond buys

(Adds comment, updates throughout)

By Naomi Tajitsu

LONDON, Dec 1 (BestGrowthStock) – The euro rose on Wednesday as a
three-day selling spree lost steam, but doubts about whether the
euro zone can contain debt problems facing some states kept the
single currency in range of a 2 1/2-month low versus the dollar.

A slight narrowing of yield premiums of government debt in
Portugal, Spain and Italy over safe-haven German bonds also
supported the euro, but market participants said the single
currency remained vulnerable to more selling. [nLDE6B00EP]

Investors awaited a European Central Bank policy meeting on
Thursday. Some expect the central bank to keep its three-month
liquidity operations unlimited to help banks struggling for
cash, which analysts said was also supporting the euro.

ECB President Jean-Claude Trichet on Tuesday suggested the
central bank may expand purchases of government bonds to help
drive down rocketing yields. [ID:nLDE6AT26U]

“The market’s been caught short on euros. Periphery yield
spreads have tightened somewhat, and the market’s pricing in the
possibility that the ECB won’t be too aggressive tomorrow,” said
Geoffrey Yu, currency strategist at UBS.

“The euro’s come down quite quickly from $1.40, so some
people just want to take a breather.”

Investors largely brushed off a relatively smooth auction of
12-month Portuguese Treasury bills even as Lisbon was required
to pay a premium on its borrowing as its fiscal problems mount.

Still, many believe investors are still speculating that
other countries may follow Ireland and Greece in asking for
bailouts, and any suggestions of this would drag the euro lower.

Portugal is widely seen as being next in line for a bailout.
Ratings agency S&P on Tuesday put its A-minus rating on review
for possible downgrade. [ID:nN30292510]


Euro zone debt timeline:

Take a Look on euro debt crisis: [ID:nLDE68T0MG]

Euro zone crisis coverage

Graphic on debt crunch:


By 1114 GMT, the euro (EUR=: ) had climbed 1 percent to the
day’s high of $1.3111, pulling away from a 2 1/2-month low of
$1.2969 hit on Tuesday.

Some traders said the euro was supported around $1.2950,
which was seen to be the bottom of a selling target. Others
suspected options at that level were due to expire on Friday.

Still, many in the market believe euro trading will become
more volatile in the near term, with one-month implied
volatility in the currency (EUR1MO=: ) climbing to roughly 16
percent early on Wednesday, its highest since June.


The euro’s rise lifted other currencies also considered to
be higher risk, including the Australian dollar. The Aussie rose
0.6 percent to $0.9630 (AUD=D4: ), recouping earlier losses versus
the U.S. currency suffered on weak economic growth data.

The safe-haven Swiss franc (CHF=: ) fell to 1.0066 francs per
dollar, its weakest since late September.

Against the yen, the dollar was flat on the day at 83.70
(JPY=: ).

The greenback slipped 0.5 percent versus a currency basket
(.DXY: ) to 80.795, but stayed near a 2 1/2-month high hit on
Tuesday as the currency, the most liquid and therefore
considered safe, has benefited from the euro’s problems.

Euro zone debt problems are also raising the cost of
accessing dollar cash for companies and banks.

While dollar interest rates such as three-month LIBOR
(USD3MFSR=: ) have risen only slightly in the past few days,
euro/dollar basis swap spreads have risen sharply in recent
weeks (EURCBS: ) in a possible sign that some euro zone banks are
trying to raise dollar cash through swaps.

Analysts said any move by the ECB to loosen its policy
stance or extend bond buying on Thursday may help to stabilise
market sentiment.

“The rhetoric and action by the ECB will become more
actively targeted at securing some stability in the sovereign
bond market. This … should help support the euro or at least
re-introduce some two-way risk,” analysts at Credit Agricole
said in a note.

(Additional reporting by Tokyo Treasury team; Editing by
John Stonestreet)

FOREX-Euro gets respite as yield spreads tighten