Euro rallies from 2-year low but gains seen as tenuous

[Gerifx]

The euro gained against the dollar o n Monday in a mostly technical rebound from a two-year

low touched earlier in the session even as the single currency

faces more headwinds from global growth concerns and the

region's ongoing debt crisis.

Euro zone finance chiefs were meeting to flesh out plans to

reinforce their common currency, but investors are cautious the

talks in Brussels may do little more than highlight the

limitations of last month's deal to help indebted states and

banks.

Diminished summit hopes also weighed on Spanish and Italian

bonds, with yields moving back up to unsustainable levels.

One bright spot came as European Central Bank President

Mario Draghi kept the door open to further interest rate cuts,

saying the bank would make any decision on further action based

on economic data. But investors cautioned it would not be enough

to sustain gains.

While lower rates typically reduce demand for a currency,

with the euro zone struggling to maintain economic growth, any

signs of action to stimulate the economy will be taken as

positive by investors.

For now though, investors were narrowly focused on the euro

having fallen too far, too fast. As it regained some temporary

footing, other investors who had bet against the euro were

forced to buy to reduce losses, giving it more strength.

"There's a significant amount of traders short euro and

therefore it is not particularly unusual to see unexplained

bursts of short-covering," said Kathy Lien, managing director of

FX strategy at BK Asset Management.

Currency speculators decreased their bets in favor of the

U.S. dollar in the latest week, according to data from the

Commodity Futures Trading Commission released on Monday.

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The euro was last up 0.2 percent against the dollar

at $1.2314 after climbing as high as $1.2324 and well off a low

of $1.2255 hit in early trade.

The dollar was last down 0.1 percent at 79.58 yen,

moving away from a two-week high hit on Thursday, according to

Reuters data.

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, aid to

Spain and Cyprus, and whether to grant concessions to Greece may

take months to finalize.

"The market's overall cautious mood and a rise in Spanish

and Italian bond yields are weighing on the euro, although

reports that Spain's budget targets may be relaxed is perhaps

providing a partial offset," said Nick Bennenbroek, head of

currency strategy at Wells Fargo in New York.

"For the week ahead we expect some consolidation in FX

markets, with an overall neutral directional view on the U.S.

dollar and other currencies," he said.

Strategists said further rises in Spanish and Italian bond

yields could push the euro down further, potentially bringing

the 2010 low into view.

European ministers were set to grant Spain an extra year to

reach its deficit targets in exchange for further budget savings

but remained far from pinning down details of bank rescues and

emergency bond-buying that are of greater concern to markets.

reuters