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Wednesday December 1, 2010 - 21:41:24 GMT
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FOREX NEWS - Euro snaps three-day drop but investors cautious

4:07pm EST

* Euro rises, broad selling momentum cools for now

* Focus on ECB meet, liquidity policy, possible bond buys

* U.S. backs European stability fund via IMF - source (Updates prices)

NEW YORK, Dec 1 (Reuters) - The euro rallied on Wednesday, snapping a three-day decline, on speculation the European Central Bank may take bold steps to ease the region's debt crisis at a meeting on Thursday.

The euro zone single currency remained vulnerable, however, given persistent fears about Europe's fiscal problems although an apparent U.S. pledge on further International Monetary Fund support pushed the euro to session highs at $1.3183 on electronic trading platform EBS. For news on the U.S. backing see [ID:nLDE6B023Z].

A U.S. Treasury Department spokesman said on Wednesday, however, that the United States is not discussing an extra commitment of funds for a European stabilization fund right now. [ID:nWAT014766]

The euro traded in a two-cent range ahead of Thursday's meeting where the ECB is expected to keep interest rates unchanged and possibly announce an extension of crisis support measures beyond their scheduled expiration in mid-January. [ID:nLDE6AT26U]

Some analysts also expect the ECB to keep its three-month liquidity operations unlimited to help banks struggling for cash.

Still, some market participants think the ECB could disappoint the market given the well-publicized conflict within the bank about buying bonds. That could prompt a resumption of the euro's sell-off in fairly short order, analysts said.

"I personally think the market will be disappointed tomorrow because the lack of a consensus within the ECB about bond purchases will cause it to deliver less than what the market is hoping for," said Aston Chan, portfolio manager at GLC, a $1.2 billion London-based global macro hedge fund.

Chan added that the euro zone crisis has morphed into a political problem given Germany's doubts about funding more bailouts. Germany is the euro zone's largest economy and its de facto lender of last resort.

In late afternoon New York trading, the euro EUR=EBS was up 1.2 percent at $1.3133, pulling away from Tuesday's 2-1/2-month low of $1.2969 but off the day's highs at $1.3183.

The euro/dollar moved back above its 200-day simple moving average at the peak and at current prices would close above that measure for the first time since Friday.

A slight narrowing of yield premiums of government debt in Portugal, Spain, and Italy over safe-haven German bonds also supported the euro, as did a rise in European stocks and a decline in the costs of periphery credit default swaps.

Relief that the Portuguese auction went well helped euro bulls counter offers at the $1.3090-$1.3100 area. For Portugal bond auction see [ID:nLDE6B00ZR].


Depending on what the ECB announces on Thursday, traders are still targeting $1.2794, a level representing the 61.8 percent retracement of the June to November rally. A breach of that should bring the August lows around $1.2600 in sight.

"Tomorrow is just one of many bridges that need crossing before we can properly value euro zone assets; as such the euro ought to be sold on rallies," said Deutsche Bank in a note.

Investors also cautioned on reading too much into news the United States would be ready to support an extension of the European Financial Stability Facility via an extra commitment of money from the IMF.

The "show of support is nice but this is far too vague a comment to get excited about," said GLC's Chan. "Can the U.S. help another country given its own deficit problems? How would that go down with the voters?"

Analysts and traders said the euro's 9 percent fall from its Nov. 4 high of $1.4283 to Tuesday's low left many feeling it was a good time to take profits on short euros.

The euro's drop below $1.3080 meant it had already retraced 50 percent of its rise from the June low of $1.1876 to the November high in less than four weeks. Traders said there was support above $1.2950, where options barriers were reported.

GLC's Chan said his firm has placed the euro's fair market valuation in the low $1.20s. "Although the euro has come down a lot since that high in November, the peripheral widening of credit spreads has actually made the euro more expensive." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Euro zone debt timeline: Take a Look on euro debt crisis: [ID:nLDE68T0MG] Euro zone crisis coverage Graphic on debt crunch: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Nick Olivari and Gertrude Chavez-Dreyfuss; Editing by James Dalgleish)

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