It News: Euro Steady as Expectations of Spanish Aid Deal Persist

Euro Steady as Expectations of Spanish Aid Deal Persist

Published: Wednesday, 3 Oct 2012
By: Reuters

The euro steadied against the dollar on Wednesday and was underpinned by the belief that Spain will eventually request financial aid, helping soothe concerns around the biggest hotspot in the euro zone's debt crisis.
Such a move would be likely to spark demand for perceived riskier currencies, although on Tuesday Spanish Prime Minister Mariano Rajoy quashed speculation the country could apply for a bailout as soon as this weekend.

Strategists said while Rajoy's words had knocked demand for the euro, losses were limited by expectations Spain will ask for international assistance at some point in coming weeks. That would allow the European Central Bank to activate its bond-buying program and bring down Madrid's borrowing costs.

The single currency was close to flat at $1.2920, but remained above the three-week low of $1.28035 hit on Monday.

Strategists said the euro [EUR= 1.2906 -0.0012 (-0.09%) ] should hold between $1.28 and Tuesday's high of $1.2968 before Thursday's European Central Bank meeting and U.S. jobs data on Friday.

"There's a little bit of doubt with respect to Spain but it's more or less inevitable they will request financial assistance at some stage," said Peter Kinsella, currency strategist at Commerzbank.

"All eyes at the moment are on non-farm payrolls on Friday. If we get a reasonably good number that will be risk on across the board and euro will grind higher. So from a short-term trading perspective the strategy should be buy on dips."

The common currency was helped by Moody's saying it would announce the results of its review of Spain's sovereign debt rating some time this month, wrongfooting euro bears who had expected an imminent downgrade.

Spain stands to lose its investment grade rating if Moody's decides to downgrade the country.

The potential for the euro to stage a rally if Spain requests a bailout was also dissuading some investors from selling the common currency aggressively.

"Rajoy has taken reform steps so he can apply for aid anytime he needs. That should discourage speculators from selling the euro too aggressively," said Seiya Nakajima, chief economist at Itochu Corp.

Rajoy announced belt-tightening measures in the 2013 budget last week and said on Tuesday he reached an agreement on fiscal consolidation with the regions, though he gave no details.

The euro had little reaction to final euro zone services PMI surveys which showed economic decline worsening in September, with much of the bad news already priced in.

Despite continuing weak euro zone data, few market players are expecting the ECB to cut rates from an already record low of 0.75 percent on Thursday.

Aussie Struggles

Traders said the resilience in the euro could partly be attributed to buying against the Australian dollar [AUDEUR= 0.7913 -0.0028 (-0.35%) ], which weakened broadly after Australia posted its biggest trade deficit in 3-1/2 years

The Aussie was also weighed down by expectations that domestic interest rates will be cut further, after the Reserve Bank of Australia on Tuesday cut its cash rate by 25 basis points to 3.25 percent, the lowest level in three years.

The euro rose to a 3-1/2 month high of A$1.2641, while the Australian dollar also fell against the U.S. currency to US$1.0202, its lowest level since Sept. 6.

Further downside for the Aussie could be limited while the Federal Reserve and European Central Bank are busy trying to stimulate their own economies as well, diminishing the allure of both the dollar and euro.

Against the yen [JPY= 78.22 0.08 (+0.1%) ] the dollar rose to a near two-week high of 78.31 yen. Traders said they saw dollar buying by U.S. corporates.