Tuesday, November 15, 2011

FOREX - Euro slips versus dlr before Italian bond auction

1 Euro slips as markets cautious ahead of Italy auction

2 Rebound possible on optimism over new Italy, Greece govts

3 Dlr/yen edges to lowest since Oct. 31 intervention


LONDON, Nov 14 (Reuters) -
                          The euro slipped against the dollar on Monday with nerves ahead of an Italian bond auction undermining initial optimisim about the prospect of crisis-fighting reforms under new governments in Italy and Greece.

On Sunday, Italy's president appointed former European Commissioner Mario Monti to head a new government charged with implementing urgent reforms to end a crisis that has endangered the whole euro zone.

Italy's 3 billion euro auction of five-year bonds was expected to find buyers, but at a record high yield which underscores the challenges the country's new technocratic government faces to restore market confidence.

The common currency slipped 0.3 percent to $1.3710 early in the London session as caution weighed ahead of the bond sale. Traders cited sizeable options expiries at $1.3750. Earlier the currency had risen as high as $1.3811 with near term resistance near its two-week high of around $1.3870 and offers from Asian sovereign investors cited above that.

"We stepped back from the brink on Thursday and Friday and the news from Italy just adds to that. The fact that we have these technocratic governments in place is a positive, in that they'll press toward the sort of austerity measures required," said Simon Derrick, head of currency research at Bank of New York Mellon.

In Greece, new prime minister Lucas Papademos begins the tough task of rebuilding Greece's credibility with financial markets by pushing through tough austerity measures needed to stave off bankruptcy.

"After a bit of consolidation we'll have the euro testing back up, and we'll be having a look at $1.3850 again in the not- too-distant-future," Derrick said.

Nevertheless after Italy's 10-year bond yield soared above 7 percent last week, to levels seen as unsustainable, markets remain nervous over the consequences of more pressure on the euro zone's largest government bond market.

Some traders said that for the euro to post more gains, it would have to break past decent resistance at around $1.3870.

YEN STRENGTH GROWING

The euro was also lower against the yen, trading at 105.62 yen. The U.S. dollar eased against the yen to 76.99 yen, its lowest since Japan's Oct. 31 intervention.

Appearing to support Japan's recent currency intervention aimed at curbing excess volatility, the head of the International Monetary Fund said on Saturday the move was in line with the spirit of the G7 and G20.

But traders said interventions, particularly unilateral actions such as Japan's latest moves, are unlikely to have a long-term impact and the dollar is likely to slip on any signs of problems in the U.S. economy.

"The dollar could fall to around 76 yen this week and to 72 yen by the end of year, said Hideki Amikura, forex chief at Nominal Trust Banking, noting that the U.S. yield curve is likely to flatten further given that the Federal Reserve has committed itself to keeping rates low until 2013.

"If the U.S. PPI (producer price index) is weak, that suggests recent strength in U.S. retail sales is due largely to price cuts, not strong demand," he said.

The dollar index stood at 77.116, well off last week's high of 78.165. The Australian dollar fell to $1.0265, well of the session high of $1.0351.

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