Short covering helping euro as long-term picture still not clear
By Deborah Levine and V. Phani Kumar, MarketWatch
NEW YORK (MarketWatch) — The dollar fell against the euro on Monday, pushing the shared currency to its highest level this year, on growing expectations of a deal between Greece and its creditors and positive news for European banks.
The euro EURUSD +1.22% rose to $1.3038 from $1.2936 in late North American trade Friday. It hasn’t closed above $1.30 since late December.
The U.S. dollar index DXY -0.66% , which gauges the greenback’s performance against a basket of six currencies, fell to 79.680 from 80.148.
Private holders of Greek debt have offered to accept losses of 65% to 70% on the value of their debt holdings, according to media reports citing the creditor’s lead negotiator, Charles Dallara, managing director of the Institute of International Finance. See more on Greek bondholder deal.
Traders shrugged off that such a deal wasn’t clear by a meeting of euro-zone finance ministers the began earlier Monday in Brussels to discuss the Greek situation, budget rules and other plans to tackle the debt crisis.
`Risk appetite has held up’
“Risk appetite has held up amid reports on the progress of negotiations over Greek-debt swaps and ahead of today’s euro-zone finance-ministers meeting,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. “As a result, the euro is heading higher.”
Analysts also noted reports that Germany and France may try to relax bank-capital rules to avoid worsening the credit crunch in Europe.
Technical patterns have also been in play, forcing some traders to reverse bets that the euro would continue falling.
“The euro shorts certainly got ahead of themselves as the euro-dollar has been caught in a squeeze,” said analysts at Saxo Bank in a note on the company’s website.
The dollar’s gains against the euro came after a 2% advance for the European currency last week, aided partly by hopes that Greece and the IIF might reach an agreement on the terms of Greece’s debt repayment.
Analysts will also be tuning into the annual meeting of the World Economic Forum in Davos, Switzerland. Read full story on what to expect from Davos.
Still, many remain very skeptical about Europe’s ability to find a market-friendly solution to the long-running and spreading sovereign debt crisis, which will keep high the short bets against the euro.
Liquidity operations by the European Central Bank to support commercial banks — which some have called a back-door version of quantitative easing — has boosted demand at recent debt auctions by some of the other countries under the microscope.
“In the bigger picture, though, I don’t think the ECB liquidity operations alter the fundamental solvency issues plaguing Italy and Spain, in particular,” said Brian Dolan, chief currency strategist at Forex.com. “Nor have euro-zone growth prospects improved. Together, those two constraints will keep risk sentiment fragile and headline driven, but for the time being risk appetite appears in recovery mode.
“We’re, we’re only a headline away from a quick setback, so I think flexibility will remain critical,” he said. “Looking at other currency pairs and other asset markets, I’m struck by the lack of strong confirmation that a significant risk reversal has occurred, potentially suggesting it was only a brief position-driven move in the euro.”
Against the Japanese yen, the dollar USDJPY -0.08% advanced slightly to buy ÂĄ77.06, versus ÂĄ76.90 on Friday
The euro EURJPY +1.16% rose to ÂĄ100.50 versus ÂĄ99.55.
The British pound GBPUSD +0.14% rose to $1.5594 against $1.5559 Friday.
Trading in Asia was thin, with financial markets in China, Hong Kong, South Korea, Taiwan and Singapore among those closed for Lunar New Year holidays. Japanese, Australian and Indian markets were open.
