FOREX-Dollar rallies as widening debt fears weigh on euro





The U.S. dollar rallied on Friday while the euro slid to a new two-month low as growing fears about the euro zone's debt crisis prompted investors to embrace safety and shun risk.

Mounting speculation that Portugal will need to follow Ireland in seeking financial aid unsettled nervous investors.

Investors rattled by Ireland's debt problems have pushed the borrowing costs of Portugal and Spain, seen as the next weakest euro zone peripheral states, to record highs.

European officials denied "absolutely false" reports Portugal was under pressure to seek a bailout and Spain ruled out on Friday needing help to manage its finances, despite fears of a spreading euro debt crisis. [ID:nLDE6AP08Y]

Nevertheless, with so much uncertainty, investors are hesitant adding euros to their positions.

The euro EUR= fell 0.85 percent to $1.3247, having dropped to as low as $1.3200 on trading platform EBS, its lowest since late September, and taking out option barriers at $1.3250 along the way. Traders cited reports of major Asian sovereign demand placed into $1.3200.

The dollar rose as high as 84.18 JPY=EBS on trading platform EBS, the strongest level since late September. It was last at 84.10 yen, up 0.63 percent, rising further from a 15-year low of 80.21 yen hit at the beginning of this month.

Against the yen EURJPY=, the euro was at 111.27, down 0.3 percent on the day.

Camilla Sutton, chief currency strategist at Scotia Capital in Toronto, said the dollar is being buoyed by European contagion fears rise and that Irish bond holders face risk.

"The escalation of problems in Europe is a crisis of confidence, which is notably difficult to quantify and project forward," she said in research note. "The pieces are in place for markets to settle yet it appears that fears are only rising."
"Risks for near-term USD trading are high, and though we continue to expect the USD to weaken in 2011, we would not be surprised to see further upward pressure on the dollar," she said.

Pressure on the euro has intensified as the spiraling debt crisis threatens to ensnare bigger countries such as Spain and Italy, while a small number of experts -- mostly not market participants -- have even begun to speculate about the euro zone's very existence.

"Peripheral issues are unlikely to go away in the short term and the euro will remain under pressure into the end of the year," said Manuel Oliveri, currency strategist at UBS in Zurich.

"Our data shows there are noticeable bond outflows from Spain and Italy, which suggests investors are becoming more unsettled," said Simon Derrick, head of currency research at Bank of New York Mellon.

Technical analysts highlighted the break of support at $1.3232, the 61.8 percent retracement of the euro's August to November rally, adding the 200-day moving average at $1.3131 was the next key level to watch.
AUSTRALIAN DOLLAR TUMBLES

The Australian dollar tumbled after its central bank quashed of an imminent rise in interest rates and the yen hit a seven-week low against the dollar, with fresh sabre-rattling by North Korea helping the U.S. currency.

The Australian dollar fell sharply as Reserve Bank Governor Glenn Stevens dampened any prospect of an imminent interest rate hike, saying rates were just right and the bank might not move on policy for some time.

The Aussie was down 1.6 percent to $0.9663 AUD=D4. For an analysis of the outlook for commodity currencies

The dollar index .DXY, which tracks the greenback's performance against a basket of six major currencies, rose to a two-month high of 80.522.