August 6, 2012 / 11:29 AM / in 5 years

Euro down vs. most major currencies on doubts on ECB plan

Euro notes are pictured at a bank in this photo illustration taken in Seoul June 18, 2012. REUTERS/Lee Jae-Won

NEW YORK (Reuters) - The euro pared gains against the dollar and slipped against other currencies on Monday as doubts resurfaced among investors about the potential effectiveness of measures pledged by European policymakers to resolve the euro zone debt crisis.

Earlier Monday, the euro had hit a one-month peak against the dollar, adding to Friday’s rally, but that came at a time when the market was very illiquid and so that move higher didn’t have much momentum to it.

The recent strengthening of the euro owed mainly to optimism about a European Central Bank plan to step in and buy bonds to reduce high Spanish and Italian borrowing costs in coming months, some analysts said.

But doubts persisted about the ECB’s proposed plan of action and many saw more pain for the euro zone before a resolution to the crisis is reached. This meant some investors were inclined to use the euro’s bounce to put on fresh bets the currency would weaken.

“There is a definite dichotomy in investor sentiment at the moment. There has been a good bit of interest from shorter-term traders to fade the recent bout of euro strength given the lack of action and follow-through from Draghi last week,” said Andrew Cox, currency strategist at CitiFX in New York.

The euro was up 0.1 percent at $1.2397 against the dollar, below a peak of $1.2443 hit in Asian trade, its strongest since July 5. Near-term resistance was seen at around $1.2478, the 61.8 percent retracement of its drop from a mid-June peak to a two-year low of $1.2042 struck in late July.

The euro zone’s common currency was down 0.2 percent against the yen at 96.96, having earlier risen to 97.79, its strongest since mid-July. It was also slightly lower against the Swiss franc and was 0.2 percent weaker against the Norwegian crown.

CitiFX’s Cox, however, pointed out not everybody is looking to sell the euro. “We see continued demand for real assets in Europe, both sovereign debt and equities, which we feel is driven by the dissipation of Euro zone tail risk -- a development that could continue to support the euro in the coming weeks.”

ECB President Mario Draghi said last week the bank would act only in cooperation with the euro zone bailout funds, and would require countries to ask for help first. Spanish Prime Minister Mariano Rajoy has signaled he may seek a full-blown aid package but is still undecided.

CHOPPY TRADING

The euro has seen choppy trading since the ECB’s policy meeting last Thursday.

While some are relieved the central bank is prepared to act by buying bonds in the secondary market and expanding its balance sheet, many are not convinced this alone will be sufficient to trigger a sustained euro rally.

However, analysts at Morgan Stanley recommend buying the euro at 96.70 yen, with a target of 105.00 yen and a stop at 95.20.

“The ball is now in the politicians’ court, and we believe it is only a matter of time before they choose, or are forced by markets, to ask for official aid, opening the door for ECB purchases and a tightening of peripheral spreads,” they said in a note to clients.

Traders said a narrowing in peripheral bond yield spread over Germany was likely to offer some support to the euro in the near term. Besides, hefty speculative bets against the euro meant that the common currency could gain some ground due to unwinding of those positions, before falling afresh. <IMM/FX>

“We remain skeptical of the euro’s gains and think any bounce into the $1.25-1.26 area will be a good level to initiate short positions again,” said Peter Kinsella, currency strategist at Commerzbank.

“What President Draghi has indicated is he will do everything to protect the euro and to us that means the ECB balance sheet will be expanded. We expect the euro to gradually depreciate, something which will help the peripheral countries.”

Additional reporting by Jessica Mortimer in London Editing by W Simon

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