FOREX-Euro pulls back from resistance, kiwi rises

Trade the News

Monday May 30, 2011 07:11:01 PM GMT

* Dollar supported by short-covering - analyst

* Euro backs off reistance at 55-day moving average

* Latest data shows further drop in IMM euro net longs

* Dollar to take cues form U.S. data, Treasury yields

By Masayuki Kitano and Antoni Slodkowski

TOKYO, May 30 (Reuters) - The euro dipped on Monday, its bounce losing steam ahead of chart resistance as investors covered short positions in the dollar following a slide in the U.S. currency late last week.

The euro still held on to the bulk of the gains it made on Friday, when it climbed more than 1 percent against the greenback for its biggest one-day percentage rise in about a month.

The euro was supported after Greek central bank chief George Provopoulos was quoted as saying on Friday that the country will repay its debts in full without restructuring if it sticks to a fiscal austerity plan. [ID:nFAT007211]

"The speed of the dollar's decline on Friday was quite extraordinary, so investors are now buying the currency back," said Sumino Kamei, senior currency analyst at Bank of Tokyo-Mitsubishi UFJ in Tokyo.

"With both the UK and the U.S. markets closed on Monday, we're not expecting any rapid moves, but the market will be paying close attention to any possible remarks regarding the state of European finances and may act quite quickly on such remarks," Kamei added.

The euro fell 0.2 percent to $1.4291 <EUR=>, having pulled back from resistance near $1.4327, its 55-day moving average.

The single currency, which has bounced off of a two-month low of $1.3968 hit a week ago on trading platform EBS, also faces resistance near $1.4369, the top of the cloud on the daily Ichimoku chart, a technical analysis tool popular among traders.

While worries about the risk of a debt restructuring by Greece continue to cast a cloud over the euro, a recent run of weak U.S. economic data and a drop in U.S. Treasury yields were weighing on the dollar, market players said.

"I get the sense that it all hinges on yields. The dollar tends to come under pressure when the market is in risk-on mode and also when U.S. yields are falling," said Koji Fukaya, director of global foreign exchange research at Credit Suisse Securities in Tokyo.

The two-year U.S. Treasury yield dipped to as low as 0.48 percent <US2YT=RR> on Friday, the lowest since early December. The euro's yield advantage over the dollar based on U.S. and German two-year government bond yields has narrowed in May. But the current level of about 109 basis points is still not far from a peak near 133 basis points hit in early May.

Another supportive factor for the euro is a recent decline in net long positions. The latest data from the U.S. Commodity Futures Trading Commission shows that speculators continued to reduce net long positions in the euro in the week to May 24. [IMM/FX]

In a sign of the recent weakness of the U.S. dollar, the New Zealand dollar extended its gains to hit its highest in 26 years of $0.8128 <NZD=D4>, the kiwi's loftiest level since it was floated in March 1985.

The New Zealand dollar has been lifted in the past week by talk of solid demand for New Zealand assets such as government bonds from Asian investors, notably central banks, and also strong commodity prices.

Market players say another currency that has attracted demand from Asian investors is the yen.

Participants say China is stepping up buying in Japanese government bonds, particularly notes with less than one year to maturity, in what looks like a fresh drive to diversify its ballooning foreign reserves after U.S. government bill yields fell.

Foreign investors have flocked to Japanese government bonds in the past five weeks, finance ministry data shows and market sources say China was among the main buyers, although a large part of buying was made through banks in London. [ID:nL3E7GT0B6]

The dollar edged up 0.2 percent from late U.S. trading on Friday to 80.91 yen <JPY=>. The dollar has retreated against the yen since hitting a three-week peak of 82.232 yen earlier in May. (Additional reporting by Nobuhiro Kubo; Editing by Joseph Radford)

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