SINGAPORE/SYDNEY: The euro steadied against the dollar on Thursday, paring sharp losses from the previous day, but was vulnerable ahead of a European Central Bank rate decision and a Spanish bond auction set to show how worried markets are about the country's economic problems.
Prior to the central bank meeting in Barcelona, Spain will sell up to 2.5 billion euros of three- and five-year bonds, testing investor appetite for the first time since slipping into recession and having its credit rating cut.
The euro was last close to flat at $1.3153, hovering within sight of the 10-day low of $1.3121 hit on Wednesday on the back of weaker-than-expected euro zone manufacturing data and rising unemployment figures.
Immediate support was seen around the 100-day moving average at $1.3118 and the April 23 trough of $1.3103.
"The temptation is to sell the euro because of what we saw yesterday. The Spanish auction results could cause some ripples but I think we will mainly be in a holding pattern into the ECB," said Daragh Maher, currency strategist at HSBC.
Most analysts expected a smooth Spanish auction due to its relatively small size, although borrowing costs were set to rise by more than a percentage point and keep pressure on policymakers to do more to shield indebted euro zone members.
The ECB is forecast to keep rates on hold at 1.0 percent. Market players will be more focused on President Mario Draghi's 1230 GMT news conference where he is expected sound cautious on growth but resist calls to restart the bank's bond-buying programme to stem rising peripheral debt yields.
"My fear for the ECB is that the market is edging towards Draghi being a bit more dovish but he will not match those expectations and disappoint a bit. People will not be entirely sure how to play that," said HSBC's Maher.
While a less dovish-than-expected Draghi and no hints of further liquidity or bond-buying may prompt some market players to buy the euro, other investors could fret the debt crisis will worsen without the ECB taking action and sell the common currency, Maher said.
LONG EURO POSITIONS Market positioning could add to risks for the euro, a trader at a major Japanese bank said, given many market players had put on bearish dollar and bullish euro bets after U.S. Federal Reserve Chairman Ben Bernanke hinted last week at the possibility of further monetary easing.
"We could see a little more downside (in the euro) due to position unwinding," the trader said.
Pressure on the euro saw the dollar index rise to 79.150, p utting further distance from a two-month trough of 78.603 plumbed on Tuesday. Against the safe-haven yen, the dollar inched up 0.1 percent to 80.24 yen, holding above Tuesday's 10-week low of 79.64.
