(Updates prices, adds quotes)
* Greek debt talks could yield breakthrough
* Net (Frankfurt: A0Z22E – news) euro short positions hit fifth straight weekly high
* Fitch downgrades five euro zone sovereigns
* USD/JPY drops on month-end exporter selling
NEW YORK (Frankfurt: A0DKRK – news) , Jan 27 (Reuters) – The euro rose to a
6-1/2-week high against the dollar on Friday as
optimism that Greece will avoid a messy default had investors
scrambling to cover short positions, but the currencies’ upside
could be contained if conditions in the region remain weak.
Data indicating a bumpy road ahead for the U.S. economy and
a downgrade of five euro zone sovereigns by Fitch Ratings agency
kept trading extremely choppy.
European officials voiced optimism that Greece could reach a
deal with creditors to avoid a disorderly default.
Greece plans to submit a final offer on a bond swap to its
private creditors by Feb. 15, Finance Minister Evangelos
Venizelos said on Friday. Negotiations on a debt swap
deal made progress and will continue over the weekend.
“Important for the euro will be if we continue to see an
improvement in financing conditions in Europe (Chicago Options: ^REURUSD – news) ,” said Charles St.
Arnaud, foreign exchange strategist at Nomura Securities in New
York.
“Over the past weeks, we have seen tensions in the funding
market with lower Euribor-OIS spread, EUR basis swap, short-term
yield on government bonds and good auction results,” he said.
“If we see a continuation of these trends, risk should continue
to trade relatively well, pushing AUD/USD and NZD/USD higher and
USD/CAD (Milan: CAD.MI – news) lower.”
The euro hit its highest level since Dec. 13, rising to
$1.3228 before retreating a bit to last trade at $1.3224, up 0.9
percent on the day, according to Reuters data.
Currency speculators increased their bets in favor of the
U.S. dollar and raised their net euro short positions to a fifth
straight record high in the latest week amid lingering doubts
about the euro zone’s debt crisis, according to data from the
Commodity Futures Trading Commission released on
Friday.
The euro briefly pared gains after Fitch Ratings downgraded
the sovereign credit ratings for Belgium, Cyprus, Italy,
Slovenia and Spain, indicating there is a 1-in-2 chance of
further downgrades in the next two years.
Against the Swiss franc, the greenback seesawed after the
GDP data. In late afternoon trading, the U.S. dollar was
down 0.8 percent at 0.9124 franc.
Against the yen, the euro fell 0.1 percent to 101.34 yen
as the Japanese currency recovered broadly from lows
struck this week.
The yen’s strength was based on “normal … end-of-month
buying of the yen by Japanese exporters,” according to a
commentary published by trader Dennis Gartman.
“They are usually ‘in’ at the month’s end for this purpose,
and they were a bit more aggressive than usual, given the yen’s
recent weakness,” he added.
U.S. data on gross domestic product showed the economy grew
at its fastest pace in 1-1/2 years in the fourth quarter, but
inventory rebuilding by businesses and slower business spending
warned of weaker growth in early 2012.
DELUGE OF DATA AHEAD
While investors will certainly keep a watchful eye on
developments in Greece and yields on sovereign debt, currency
prices will also take a cue from a deluge of European and U.S.
economic data next week, ranging from European PMIs to U.S. home
prices and Friday’s U.S. Labor Department report on nonfarm
payrolls and unemployment.
If U.S. data comes in softer than expected it may heighten
expectations of a third round of quantitative easing from the
Federal Reserve. That would weigh negatively on the dollar as
QE3 would be tantamount to printing money and therefore dilute
its value.
Fed Chairman Ben Bernanke this week painted a picture of an
economy mired in slow growth, and the Fed delayed the timing for
an interest rate hike until at least late 2014. He also
suggested the U.S. central bank is open to buying more bonds in
a bid to stimulate borrowing and investments.
The dollar last traded at 76.72 yen, 0.9 percent lower
, leaving the yen on track for its biggest daily gain
since late August.
“The yen is overvalued and its trade dynamics are reflective
of the need to import energy, the softening of global demand and
the overseas shift of production that was threatened by Japanese
multinationals last year,” said Constantine Ponticos, managing
director, research, at Pareto Investment Management in London.
Ponticos said they have been recently been selling European
currencies against everything, namely the U.S. dollar,
Australian dollar and yen.
Pareto (Other OTC: PETOF.PK – news) , Bank of New York Mellon’s currency specialist
division, has $45 billion is the assets under management.
“In the absence of banking/sovereign crises elsewhere I
would have expected the Japanese yen to be trading a lot lower
but, in my opinion, the current account will not bring that
about on its own in the near term,” he said.
(Additional reporting by Luciana Lopez and Nick Olivari in New
York and Anirban Nag in London; Editing by Chizu Nomiyama and
Dan Grebler)
