WSJ:WORLD FOREX: Euro Unchanged As Focus On China Moves
-- Focus on whether China will buy Italian bonds
-- If China ends up buying bonds, it is seen as only bringing short-term relief to market jitters
-- Investors see debt problems only getting worse ahead
By Takashi Mochizuki
Of DOW JONES NEWSWIRES
TOKYO (Dow Jones)--The euro was almost unchanged against the dollar and yen in Asia on Tuesday as investors pay close attention to whether China will provide temporary relief to the European sovereign debt problem by buying Italian bonds.
A Wall Street Journal report said on Monday that Italy's Finance Ministry has held talks with China's sovereign wealth fund and other Chinese officials in a bid to persuade Beijing to buy large amounts of Italian bonds, citing people familiar with the matter.
Market participants are focused on what China will do "because it is the only one big country that can take such a risk and ease market concerns over the European debt problems," said Toshihiko Sakai, a senior dealer at Mitsubishi UFJ Trust and Banking.
In the longer-term however, Tokyo dealers think the debt problems can only get worse in the months ahead. Satoshi Tate, a senior dealer at Mizuho Corporate Bank, said "China alone cannot support all of Europe."
Shares of financial firms have been falling recently, which is an indication of investor speculation that these banks will be forced to increase capital. That could be a prelude to a funding crisis that prompts investors to decrease their holdings of risk-sensitive units further, dealers said.
They added that European countries may issue more bonds to prevent a funding crisis, but that could prompt rating firms to downgrade sovereign debt in the region further, also propelling risk-aversion movements. Sakai at Mitsubishi UFJ Trust and Banking said France being downgraded is now "a real possibility."
As of 0450GMT, the euro was at $1.3678 and Y105.36 from $1.3680 and Y105.55 in New York Monday. Sakai said the euro may fall below the psychologically-important mark of Y100.0 by the end of this month.
The dollar, meanwhile, was at Y77.02 from Y77.24 while the dollar index was at 77.073.
For the time being, the yen remains poised to strengthen because of its safe-haven status, Tate at Mizuho Corporate Bank said.
"Unlike some European nations, it's very hard to expect that yields on Japanese government bonds will rise sharply anytime soon. The yen is investors' favorite choice," he said.
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