RTRS: China data gives euro a boost, markets still nervous
By Steven C. Johnson
NEW YORK, July 13 (Reuters) - The euro rose broadly on Wednesday, snapping a three-day losing streak as surprisingly swift Chinese growth brightened the global outlook and diverted attention from a worsening euro zone debt crisis.
Even so, traders said markets remained on edge. The yen hit its highest level against the dollar since Japan's earthquake in March as investors unwound risky trades funded with yen.
Investors were also wary ahead of Federal Reserve Chairman Ben Bernanke's testimony to Congress after minutes from the central bank's last meeting showed some officials thought a fragile economy may need more easing. [ID:nN1E76B1XL]
Then there's Europe, where fear that a the debt crisis that has persisted for more than a year was spreading from small countries such as Greece and Ireland to big ones like Italy.
European Union leaders are expected to convene an emergency meeting on Friday. [ID:nL6E7IC097]
"I'd call this a short-term respite, with stronger Chinese growth the catalyst, but markets are extraordinarily jittery. . "That's reflected in the rise in gold prices and the yen," said Firas Askari, head of FX trading at BMO Capital Markets.
Gold prices hit a record high on Wednesday [ID:nL6E7ID17D]
For the first time since may, markets viewed German government debt as riskier than U.S. debt. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
"If we don't hear anything substantial from Europe by the weekend, people will be back to shorting the euro next week."
The euro was last at $1.4050 EUR=, up 0.5 percent and off a four-month low beneath $1.39 hit Tuesday. It also rose more than 1 percent against the yen EURJPY= and rebounded from a record low against the Swiss franc EURCHF=EBS
The dollar fell as low as 78.38 yen JPY=EBS overnight before rebounding to 79.29 yen as the Chinese data helped improve risk appetite. For more on China: [ID:nL3E7ID0AS] [ID:nL3E7ID0GA]
Japanese margin traders' net foreign currency buying was at a record high, according to data from exchange TFX.
That brought warnings from top Japanese officials worried that a strengthening yen will hurt Japan's fragile economy, raising the possibility that authorities could intervene to weaken the currency. [ID:nT9E7HS04S] [ID:nL3E7ID007]
"Intervention is possible given the rhetoric we have had in the past few days," said Simon Derrick head of currency research at Bank of New York Mellon. "It will be a wait-and-watch situation."
The high-yielding, commodity-sensitive Australian dollar AUD=D4 and New Zealand dollar NZD=D4 rose on renewed risk appetite, but traders said it was dangerous to extend bets too far.
Europe's woes are largely the reason for that. Underscoring the difficulties facing policymakers there, Moody's on Tuesday cut Ireland's credit rating to junk, putting it in the same camp as Greece and Portugal. The agency fears all three may need a second round of emergency aid.
The EU is trying to sort out just such a second round for Greece, and authorities conceded this week that they may have to allow the country to default on some of its debt.
That's raised fear about the impact on other countries, particularly Italy, which has the euro zone's second highest debt-to-output ratio after Greece.
Italian and Spanish bond yields have soared this seek, and Italy's short-term borrowing cost hit its highest since 2008 at a 12-month bill auction this week.
BNP Paribas strategist said in a note to clients that the euro's rebound "looks to be based on flimsy evidence."
In the options market, one-month risk reversals were elevated in favor of euro puts -- options to sell the currency EUR1MRR=ICAP, with plenty of event risks ahead, including the results of stress tests on euro zone banks due out on Friday.
(Additional reporting by Nia Willians in London) (Editing by Theodore d'Afflisio)
