FOREX-Euro pressured by debt worry, sterling falters

* Euro flat on day at $1.2651 (EUR=: )

* Talk of euro option barriers at $1.25 and $1.31

* Stg gives up gains as new UK govt starts; BoE report eyed

* News of Morgan Stanley probed by authorities lifts yen

(Adds quote, updates prices, changes dateline prvs TOKYO)

By Tamawa Desai

LONDON, May 12 (BestGrowthStock) – The euro remained under pressure
on Wednesday on worries about the euro zone’s ability to tackle
its debt crisis, while sterling turned lower against the dollar
after a new coalition UK government was formed.

An initial relief rally after a $1 trillion emergency aid
package was announced on Monday to prevent the spread of a euro
zone debt crisis dissipated and focus switched back to
structural problems plaguing the bloc.

“Uncertainty continues to rule the roost for the single
currency and there is no sign of this ending anytime soon,” said
Stuart Bennett, currency strategist at Credit Agricole CIB.

A pullback in risk appetite was compounded after the Wall
Street Journal reported U.S. federal investigators are probing
whether Morgan Stanley (MS.N: ) (Read more about the money market today. ) misled investors about
mortgage-derivative products it helped design and sometimes bet
against. [ID:nSGE64B05F]

At 0809 GMT, the euro was down 0.1 percent at $1.2635
(EUR=: ), having retreated from Monday’s high near $1.3100.
Initial support was seen around $1.2580, near Friday’s lows.

In one potentially supportive factor, traders cited talk of
a double no-touch option position in the euro with barriers at
$1.25 and $1.31. Such a position suggests that the holder would
buy euros on any drop towards $1.25 to defend that position
until it expires.

Others cited barriers at $1.26, and big stop-loss sales
below $1.2580.

STERLING FALTERS

Against the yen, the euro was also down 0.1 percent at
117.14 yen (EURJPY=R: ), having fallen from above 122 yen touched
earlier this week.

The euro remains on a downtrend versus the yen after its
21-day moving average slipped below the 65-day moving average on
Tuesday, forming a so-called “death cross”, a bearish sign, Bank
of Tokyo-Mitsubishi UFJ FX analysts said in a note.

European Central Bank President Jean-Claude Trichet
reiterated on Wednesday the central bank’s stance to sterilise,
or drain excess liquidity from its government bond buying.

“All liquidity which is being put in through these
interventions will be taken back. We are not running money
printing presses,” he said on French radio.

The dollar was flat on the day at 92.67 yen (JPY=: ).

“The WSJ report prompted investors to reduce risks and there
is a mood that players are looking for negative factors now,” an
FX trader at a Japanese trust bank said.

Sterling slipped back from highs hit the previous day after
Conservative leader David Cameron became Britain’s new prime
minister on Tuesday after securing a power-sharing agreement
between his centre-right party and the smaller Liberal
Democrats.

They plan to stick to the Conservatives’ line of taking
immediate steps to reduce the budget deficit, seen rising to
more than 11 percent of GDP this year, by cutting 6 billion
pounds in non-frontline services this year. But there was
uncertainty in the market about the new government’s overall
deficit reduction plans.

Sterling slipped 0.2 percent to $1.4918 (GBP=D4: ) after
rising above $1.5000 on Tuesday. The euro edged up 0.2 percent
against sterling to 84.78 pence (EURGBP=D4: ) after falling 1.6
percent on Tuesday.

Markets will also eye the Bank of England’s quarterly
inflation report due out on Wednesday.

Stock Investing
(Additional reporting by Kaori Kaneko in Tokyo; Editing by
Susan Fenton)

FOREX-Euro pressured by debt worry, sterling falters