Euro edges off two-year lows but vulnerable

The euro steadied after hitting a two-year low against the dollar early on Monday, looking vulnerable to concerns that a meeting of finance ministers later will merely highlight the limitations of anti-crisis steps agreed last month.

Monday’s meeting will focus on follow-up steps to the plan drafted in June by European leaders to shore up indebted states and banks. Doubts about its effectiveness surfaced last week, leaving room for disappointment and more losses for the euro.

Further rises in Spanish and Italian bond yields, which have recently hit levels seen as unsustainable, could push the euro down further, bringing the 2010 low of $1.1876 into view.

But having lost more than 3 percent against the dollar last week, the euro may have scope for a temporary rebound as traders take profit on hefty bearish positions.

“The euro has moved a great distance in a short period and there is a risk of a bit of a correction. But unless it rises through $1.2410 it will still be worth selling into any rallies,» said Jeremy Stretch, head of currency strategy at CIBC.

“There is nothing too positive expected from the Eurogroup (finance ministers) meeting or from a speech by (European Central Bank president Mario) Draghi this afternoon.”

The euro was up 0.1 percent against the dollar at $1.2305, off a low of $1.2225 hit in thin early trade.

It hit a session high of $1.2316 after the European Commission said direct recapitalization of banks will not need sovereign guarantees, but offers to sell the currency at $1.2320/40 are likely to cap gains.

The euro came under pressure last week as doubts quickly surfaced about the effectiveness of the June summit deal. It fell further following an interest rate cut by the European Central Bank last week which eroded the return investors get for holding it.

Pressure for action by European leaders is growing, but there are nagging concerns that decisions on issues such as banking supervision, how to use Europe’s rescue money to recapitalize banks and whether to grant concessions to Greece may take months to finalize.

“There is a risk of more disappointment from today’s meeting that will keep the euro under pressure,» said Geoff Kendrick, currency analyst Nomura. «We see it dropping towards $1.20 and around $1.1875 in the near term and retain our core short positions against the euro. There could be some consolidation, but overall the direction remains lower.”

With the euro struggling, the dollar index .DXY was at 83.208, not far off a June 1 peak of 83.542. A break above there would take it back to highs not seen since mid-2010.

After disappointing US jobs data on Friday, softer than expected Chinese inflation numbers added to concerns Europe’s debt crisis was weighing on global growth, likely stoking demand for the safe-haven dollar and the Japanese yen.

Against the yen, the euro touched a one-month low of 97.48 yen, before rising back to 97.85 yen.

Morgan Stanley in a trading recommendation said it was advising clients to sell the euro against the yen with a target of 95.60 yen and stop-losses at 99.60.

“We expect euro to fall against the yen with low confidence surrounding the European situation and global risk appetite remaining challenged,» it said in a note.

“We see little to prevent the yen regaining its safe haven support in the coming week. We expect only limited BoJ monetary policy action, also keeping the yen supported.”

The dollar was slightly lower at 79.55, moving away from a two-week high of 80.099 hit on Thursday. Chart support was seen at the 200-day moving average at 78.97 yen.

Data on Monday showed Japan’s core machinery orders fell at a record pace in May, but the market reaction was muted because it failed to change expectations the Bank of Japan will stand pat on policy at its meeting this week.

Commodity currencies remained under pressure after the weak US jobs numbers, with the Australian dollar down 0.3 percent at $1.0180, down from a two-month high of $1.0330 hit last week.


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