Euro off 9-wk high, holds above 50 pct retracement
The euro backed away from a nine-week high on profit-taking on Monday, though easing euro zone debt worries supported the single currency.
The euro held above key resistance around $1.3570 that it broke on Friday, a 50 percent retracement of its decline from November to early this month, as data showed speculators have closed all their bets against the currency.
Speculators turned long on the euro for the first time in two months in the week ended Jan. 18 while doubling their bets against the greenback, figures from the Commodity Futures Trading Commission showed on Friday.
"After speculators flip their positionings, they tend to build up more of their new positions for some time. So the euro still looks to be on a rising trend to me," said a trader at a Japanese bank.
The euro last traded at $1.3596, having briefly hit a fresh two-month high at $1.3648 in early Australasian trade on Monday, compared with around $1.3620 late in New York on Friday.
The currency piercing resistance around $1.3570 brings into view $1.3740, a 61.8 percent retracement of its decline from November to early this month.
The euro has rallied some 6 percent in the past two weeks as demand from Asian central banks spurred wider buying in the common currency.
But as the CFTC data shows speculators no longer have short positions that need to be closed, the euro's momentum is likely to slow, some market players said.
"As we can't expect more short-covering, the euro no longer has an engine for its rally," says a trader at a Japanese brokerage.
Thus the news that Ireland's junior coalition party withdrew from Prime Minister Brian Cowen's government on Sunday, hastening an election due on March 11, was enough to trigger profit-taking.
"Above $1.36 on euro and, while we're not quite there yet, sub-78 on the DXY, and I'd begin to think it's overdone. Still, it's hard to see what the catalyst is to change minds," said Robert Rennie, a currency strategist at Westpac Bank.
Euro bears were wary of becoming too negative having been badly burnt in the last couple of weeks.
"I don't think sovereign debt problems will go away but the thing is Europe does have a safety net already," said Minori Uchida, senior analyst at Bank of Tokyo-Mitsubishi UFJ.
"And on the other hand it is not as if the U.S. doesn't have fiscal problems. Its deficit is widening sharply on planned tax cuts and the finances of many of its states are strained. I suspect there will be a time later this year when the market will focus on U.S. debt problems," he added.
The premium on 10-year credit default swaps on U.S. sovereign debt hit a near-two-year high last week and U.S. municipal bonds have been under pressure for some time.
While the level of the credit spread on U.S. sovereign debt is still low, its recent rise contrasted with a fall in credit spreads in Italy, Spain and Portugal in the past couple of weeks.
The euro drew additional help from tough talk on keeping inflation in check from European Central Bank chief Jean-Claude Trichet.
In an interview with the Wall Street Journal on Sunday, Trichet said core inflation was not a good gauge of future price pressures and that the central bank was ensuring higher energy prices do not seep into other prices.
In contrast, the U.S. Federal Reserve is more worried about reviving the job market and the Fed statement on Wednesday is likely to give only a sober assessment of the sluggish recovery.
This has helped drive euro zone benchmark German 2-year yields to one-year highs and pushed its spread to the equivalent U.S. yield to the widest in about two years, making the euro more attractive against the dollar for some investors.
Against the yen, the single currency was last at 112.50 yen, having hit a two-month high of 112.63 in choppy early trade and rising above its 200-day moving average for the first time in over a year.
Against the Swiss franc, the euro also held near Friday's 1-½ month high of 1.3068 franc, standing at 1.3041. The common currency also hit a two-month high against the Australian dollar near A$1.38.
"We'll be watching to see if this momentum remains in place. With periphery issues no longer fully offsetting the improving (at least in Germany) macro backdrop, watch the deck of euro zone PMIs due on Monday," said David Watt, strategist at RBC Capital Markets.
The euro's rebound has left the dollar languishing near two-month lows against a basket of major currencies. The dollar index last traded at 78.256, not far from a two-month low of 78.096 hit on Friday.
The dollar bought 82.75 yen, trapped in a range roughly between 81 yen and 84 yen seen so far this month.
The Australian dollar slipped 0.2 percent to $0.9878, dented by lower-than-expected Australian producer prices.
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