FOREX-Euro up thinly before sales





The euro made thin gains on Wednesday, extending this week's rebound but with limited ability to rise much as caution gripped the market ahead of debt sales by highly indebted euro zone countries.

Portugal is due to tap bond investors on Wednesday while Spain is looking to sell up to 3 billion euros ($3.89 billion) worth on Thursday. Markets are keen to see if they can obtain funding at a sustainable cost or if they will be forced to turn to the European Union and IMF for help.

"If Portugal has to pay over 7 percent it will be inevitable for it to ask for help," said a trader at a Japanese bank.

For now though the common currency is enjoying a reprieve after euro zone sources said the region's finance ministers are likely next week to consider the option of raising the effective lending capacity of the currency bloc's rescue fund as part of efforts to calm jittery markets. [ID:nLDE70A1RM]

This follows Japan's promise to support an upcoming euro zone bond sale and talk the European Central Bank had bought debt to help stabilise markets.

The common currency ticked up 0.1 percent to $1.2983 EUR=, and kept gains from a four-month trough of around $1.2860 hit on Monday.

But it was off the day's high of $1.3017 marked after attempts to take out stop-loss orders said to be lurking above $1.30.

The dollar's weakness against Asian and other emerging economy currencies is indirectly helping the euro, a U.S. bank trader said.

Further resistance is seen at its Dec. 23 low of $1.3055 and the 200-day moving average around $1.3070, and many traders see little chance of the euro rising above those levels in the near term.

BNP Paribas strategists said in a report that they expect the euro's rise to remain limited to $1.3000/40, which would provide renewed selling opportunities with a target for a break below $1.2875 and then $1.2590.

In the options market, however, risk reversal spreads stood at 0.75/1.5 percent in favour of euro puts EUR1MRR=GFI, near the lowest level in two months, meaning euro puts, which give investors protection against falls in the euro, are at their cheapest level in two months relative to euro calls.

An options trader at a Japanese bank said flows related to exotic options such as no-touch options may be behind this.
The immediate focus is on Wednesday's debt sale by Portugal, widely seen as the next euro zone weakling to seek a bailout after Greece and Ireland.

Lisbon, which plans to sell up to 1.25 billion euros ($1.62 billion) in four- and 10-year bonds, will likely need to offer record high premiums to place its debt. [ID:nLDE70A20B]

Recent bond buying by the European Central Bank helped drive down the yield on Portugal's benchmark 10-year bond PT10YT=TWEB to below 7 percent on Tuesday from euro lifetime highs of 7.3 percent last week.

Against the yen, the single European currency was flat at 108.00 yen EURJPY=R, but well off four-month lows around 106.81 set on Monday.

As the euro won a reprieve, the dollar index =USD .DXY, which tracks the performance of the greenback against a basket of major currencies, slipped 0.2 percent to 80.63, off a five-week high around 81.313 set on Monday.

Versus the yen, the dollar slipped a tad to 83.08 yen JPY=, though it held well above this week's low around 82.66, with gains in global stocks weighing on demand for the yen.

Meanwhile, the Australian dollar hit a fresh one-month low around $0.9803 AUD=D4, though option triggers at $0.98 and upbeat Australian housing data helped it limp back to $0.9860.

Mounting worries that massive floods in northeast Australia could hamper growth were taking a toll on the Aussie, knocking it further from a 28-year high around $1.0250 set on Dec. 31.

Warwick McKibbin, a Reserve Bank of Australia board member, was quoted in the Sydney Morning Herald as saying the floods could cut economic growth by up to 1 percentage point.

Estimates by other economists were less grim, though, with many expecting the floods to at most knock 0.5 percentage point off growth.