FOREX-Euro up, China denies report on FX reserves

* Euro rises as China says Greece won’t affect investments

* High-risk FX rallies as stocks, commodities climb

* Analysts say euro less attractive as reserve currency

By Neal Armstrong

LONDON, May 27 (BestGrowthStock) – The euro rose on Thursday after
Chinese officials denied a report that Beijing may distance
itself from bond holdings from the euro zone, which has been
afflicted by debt problems in Greece and other countries.

China said Europe remains a key investment market for its
massive currency reserves [ID:nTOE64Q04P]. This helped the euro
recover losses suffered on Wednesday, when the Financial Times
reported that Beijing was reviewing its euro zone debt holdings.

Analysts said comments from China’s government and central
banks knocking down the report provided an opportunity for
investors to cover short positions in the euro, which has taken
a beating on concerns about the euro zone debt crisis.

But they added that worries about how global growth may be
impacted by deficits in the euro zone and belt-tightening
efforts to reduce them would keep investors wary about holding
risky assets, and would keep the euro under selling pressure.
“The China comments downplaying the alleged change in
diversification policy are reassuring on the surface and that
has helped the euro rise,” said Lee Hardman, currency analyst at
BTM-UFJ.

“But it comes down to actions rather than words and if the
European debt crisis keeps rising, there will be less attraction
for China to diversify from dollars into euros,” he said.

At 1118 GMT, the euro (EUR=: ) traded 1 percent higher on the
day at $1.2285, having climbed as high as $1.2342. Traders said
short covering in thin conditions ahead of market holidays in
Britain and the United States on Monday had exacerbated moves.

A 2 percent rise in European shares (.FTEU3: ) due to a
short-covering rally helped to support the euro as higher-risk
currencies rallied as equity and commodity pries climbed.

The euro rallied 1.8 percent against the yen to 111.15 yen
(EURJPY=R: ), pulling away from an 8-1/2 year low of 108.83 yen
hit this week as gains in risky assets stung the low-yielding
yen. The dollar (JPY=: ) rose 0.7 percent to 90.50 yen.

The high-yielding Australian dollar rose more than 2 percent
against its U.S. counterpart and 3 percent versus the yen.

SPAIN AUSTERITY MEASURES

The euro offered little reaction to the Spanish parliament’s
approval of a 15 billion euro austerity package on Thursday
[ID:nLDE64Q0KF]. Analysts said this was due to doubts about
whether Spain will be able to implement the measures.

“(The lack of reaction) displays deep-seated scepticism
about whether a country like Spain can really stomach further
austerity,” said Jane Foley, research director at Forex.com.

She added that Spain’s moves to rein in its budget did not
chase away worries about the potential threat of debt problems.
She said that while short covering was supporting the single
currency at the moment, more losses were in store.

The euro managed to hold above last week’s four-year trough
of $1.2143 as well as support near $1.2135, which is roughly a
50 percent retracement of its rally from a record trough near
$0.8225 to its all-time peak of $1.6040.

China’s State Administration of Foreign Exchange said there
was “no basis in fact” of a Financial Times report on Wednesday
that Beijing was reviewing its euro zone debt holdings because
of growing concerns about gaping deficits in countries including
Greece and Portugal. [ID:nSGE64P04M]

The denial comes as market participants speculate that China
may be getting nervous about Europe’s economic outlook, and that
it may be wary about increasing its euro zone debt holdings.

Traders said a report Kuwait was mulling reducing euro zone
investments also highlighted the possibility that other
countries may shy away from euro zone assets. [ID:nLDE64Q0IX]

Stock Market Basics

(Additional reporting by Naomi Tajitsu)

FOREX-Euro up, China denies report on FX reserves