Mon Jun 18, 2012 8:10pm IST


* Greek bounce short-lived; Spain, Italy fears dominate * Spanish 10-year bond yields rise above 7 pct * Euro seen a sell into any bounce By Gertrude Chavez-Dreyfuss NEW YORK, June 18 (Reuters) - The euro fell from a one-monthhigh against the dollar on Monday after four days of gains, asan election win for pro-bailout parties in Greece failed to easeworries about Spain's debt problems after borrowing costs surgedto unsustainable levels. While the election result appeased immediate concerns aboutGreece being forced out of the euro zone, uncertainty persistedas the winning New Democracy party must now try to put togethera government with other parties backing the internationalbailout, which is not an easy task to do. Antonis Samaras, the New Democracy leader, on Monday, saidthe country needed as broad a coalition government as possible,after radical leftist refused to join. Market players also fretted about the euro zone's ability torespond to the risk of contagion to other larger economies likeSpain and Italy, with investors likely selling into anynear-term bounce by the euro. "The win in Greece does not really resolve anything. It'sstill going to be tough for Greece," said Boris Schlossberg,managing director at investment advisory firm BK AssetManagement in New York. "And with Spanish and Italian yields at high levels, thecredit market remained skeptical that Europe is going to get outof the debt crisis." Ten-year Spanish government bond yields, hit by persistentconcern about the country's fiscal and banking problems, roseabove the 7 percent line seen as unsustainable in the long-termand at a level that forced other peripheral euro zone nations toseek bailouts. The euro was down 0.3 percent on the day at $1.2602,off a one-month high of $1.2747 struck in the Asian session, asit came under pressure on reported selling by Asian sovereigninvestors. This was the euro's worst showing in a week. It fell past reported stop-loss orders around $1.2660-70 to$1.2620 in the European session with support expected around theJune 13 high of $1.2610. The euro also failed to hold gains after a positive Greekoutcome as the result had already been priced last week. Greekequities, for instance, had rallied 14.1 percent between Tuesdayand Friday, while the euro rose from roughly $1.25 to $1.2650 inand the S&P 500 rallied 2.5 percent in the same period. Some strategists, however, saw potential for the euro torise given a build-up of huge bearish positions in the commoncurrency, taken on fears about a Greek exit from the euro zone. But Howard Jones, adviser at RMG Wealth Management, said anyrebound to $1.28 is a selling opportunity. Positioning data showed speculators' massive net euro shortpositions of 195,187 contracts last week, even after havingtrimmed them from the previous week's record high of 214,418contracts. Fund of funds Quaesta Capital in Zurich Switzerland, whichmanages $3 billion in assets, saw euro shorts among its fundmanagers continuing to be one of the biggest positions lastweek, along with bets against the Swiss franc. Interestingly, the U.S. dollar showed the largest outflowlast week in the portfolios of the fund managers Quaesta tracks,while the Canadian currency showed the biggest inflow last week. The dollar index was up 0.3 percent at 81.863 after hittinga one-month low of 81.266. Against the yen, the euro slipped 0.1 percent to 99.34, while the dollar advanced 0.2 percent TO 78.85 YEN as a result of the initial risk-positive reaction to theGreek vote. FED QE RISK MAY HELP EURO In the options market, near-term implied volatilities fell,with the one-week easing to 11.45 percent from a high of around16.75 percent last Thursday, while the one-month fell to aroughly four-week low of 11.26 percent. However, one-month risk reversals stillpointed to a bias for euro weakness. European finance ministers meet on Friday and a summit isscheduled for the end of this month, but little is expected inthe way of fresh policy measures towards a banking union orgreater fiscal integration like common euro bonds. Traders expect some volatility in the currency market incoming days. The common currency, however, could benefit versusthe dollar on speculation that the U.S. Federal Reserve may optfor more easing to boost growth. Many market players expect the Fed to extend its long-termbond-buying through Operation Twist by a few months from thecurrent deadline of June, after a series of disappointing data. Citigroup's economists, for instance, expect a modestextension of Operation Twist by $200 billion, although it maynot have as much risk-positive impact as the two rounds ofquantitative easing.
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