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Monday May 31, 2010 - 12:24:07 GMT
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FOREX NEWS - Euro edges up, but still vulnerable (RTRS)

8:04am EDT

* Limited impact from Spain downgrade

* Analysts say euro to stay under pressure

* Currencies little changed in holiday-thinned market

(Adds comment, updates throughout)

By Naomi Tajitsu

LONDON, May 31 (Reuters) - The euro inched up on Monday, recouping small losses incurred after a cut to Spain's debt rating, but the currency remained on the back foot as the downgrade highlighted ongoing structural weaknesses in the euro zone.

A warning from China that the global economy remained vulnerable to sovereign debt risks capped demand for higher-risk currencies, while investors were wary of taking on big positions given market holidays in the UK and the United States.

Spain's downgrade by ratings agency Fitch on Friday tracked a move by S&P last month, and analysts said the reaction from currency markets had been limited as the cut had been widely expected. [ID:nLDE64R25A]

But many say the euro is poised for more losses after its dramatic tumble this month given that structural problems remain in some euro zone countries, while uncertainties about the scale of the debt crisis in the region will keep investors jittery.

"I wouldn't draw the conclusion that because the markets didn't react to the downgrade that the pressure isn't to the downside on the euro," said Lutz Karpowitz, currency analyst at Commerzbank in Frankfurt.

"We don't have a solution for the debt crisis right now. The pressure on the euro will remain."

By 1139 GMT, the euro EUR= was little changed on the day at $1.2290 in holiday-thinned European trade, regaining its composure after a slide to $1.2263 on Friday, according to Reuters data.

Against a broadly weaker yen, it rose 0.7 percent to 112.40 yen.

But a short-covering rally that had pushed the currency up to around $1.2670 just a over week ago has petered out, the latest IMM positioning data shows. [IMM/FX]

Analysts said investors had already started to increase short positions in the single currency, which may add to increasing downward pressure in the coming weeks.

"The latest IMM data shows no significant reduction in short euro positions, and we think that many speculators added to short euro positions when we went higher (two weeks ago)," said John Hydeskov, senior currency analyst at Danske in Copehagen.

He added that lack of follow-through in the euro's short-covering rally was a reason for the pullback to $1.23.

Even as the single currency looked set to have fallen around 7.5 percent against the dollar during May, European Central Bank President Jean-Claude Trichet on Monday said the euro was a "credible currency" which was holding its value very well. [ID:nFLAVGE61S]


Ongoing safe-haven demand nudged the dollar .DXY 0.2 percent higher versus a currency basket, while it rose 0.5 percent to 91.50 yen.

Sterling edged up 0.1 percent to $1.4485 GBP=D4. European traders showed limited reaction to the resignation of a UK treasury minister on Saturday following revelations about his expenses. [ID:nLDE64S0HK] Underlining ongoing economic risks, China's Wen warned on Monday that global growth remained vulnerable to sovereign debt risks and the possibility of a second downturn. [ID:nTOE64U03S]

Underscoring worries about debt pressures, France admitted on Sunday that keeping its top-notch credit rating would be "a stretch" if tough budget decisions were not taken. [ID:nLDE64T0A8]

The storming of Gaza-bound ships on Monday by Israeli commandos, who killed more than 10 activists on board, had no immediate impact on major currencies, but analysts said increasing geopolitical tensions may raise risk aversion in the future, keeping safe-haven demand for dollars intact. [ID:nLDE64U0P3]

(Editing by John Stonestreet)

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