FOREX-Euro up versus dollar but Portugal debt sale eyed



The euro rallied on Tuesday on speculation euro zone officials could raise the effective lending capacity of the bloc's rescue fund and on talk of increased Portuguese bond buying by the European Central Bank.

The euro climbed closer to $1.30 as the New York session wound down but analysts cautioned it could easily resume its downward trend given nervousness over a heavy schedule of debt issuance by southern European countries this week.

A critical test for the euro will come on Wednesday when Portugal is scheduled to sell up to 1.25 billion euros of bonds in an auction that will signal whether the indebted country will be able to afford to raise funds in the debt market or be forced to take a bailout.

"Given that there are a lot of issues still unsettled with the European debt crisis, which is likely to continue for many months, there's always going to be pressure on the euro," said Ihab Salib, senior portfolio manager and head of international fixed-income at Federated Investors in Pittsburgh.

Federated Investors manages about $341.3 billion in assets. Salib oversees more than $3 billion.

The euro last traded up 0.2 percent at $1.2980 EUR=EBS, having risen as high as $1.2994 on trading platform EBS.

Euro resistance is at its 200-day moving average of $1.3072 while support is around $1.2794, the 61.8 percent Fibonacci retracement of a June-to-November rally.

Traders still expect the euro to retest its four-month low around $1.2875 set on Monday, with a break likely opening the door to a drop towards $1.2645 and $1.2590 in the coming weeks.

Finance ministers are likely to consider next week the option of raising the effective lending capacity of the euro zone rescue fund as part of efforts to calm sovereign debt markets. For details see [ID:nLDE70A1RM].

Market talk of increased Portuguese bond buying by the European Central Bank added to the euro's luster in the New York session.

The euro earlier also found support after Japan said it will purchase euro zone bonds to bolster confidence in the European Financial Stability Facility but in a volatile session momentum faded after Tokyo said it would use existing euro reserves to pay for the debt.

Tokyo's pledge came after China assured Spain it would invest in the indebted euro zone state's bonds -- an assurance whose impact also proved fleeting.
The support (from Japan) looks set to come from existing euro reserves, so it will not form an increase in the allocation of the euro," said Mary Nicola, currency strategist at BNP Paribas in New York. "In fact, if it's a reallocation away from the peripheral bond markets to the EFSF bonds, then it could prove to be euro negative."

AUCTIONS IN FOCUS

Portugal's prime minister and finance minister said on Tuesday Portugal has no plans to seek a bailout, and the government was doing everything possible to avoid doing so. [ID:nLDE70A0V5]

Italy and Spain are due to tap the bond market on Thursday, in auctions that will be watched for any sign of contagion.

Analysts said the euro could see a relief rally once the three bond auctions were out of the way, though if borrowing costs stayed high any gains would be temporary.

The dollar rose 0.6 percent to 83.22 yen JPY=EBS as recent optimism about the U.S. economy helped lift bond yields.

The Swiss franc extended the prior day's sell-off amid growing concern about the impact of the record-strong franc on the domestic economy. The dollar hit a one-month high of 0.9784 Swiss franc on EBS CHF=EBS.