Euro slips on profit-taking

The yen recouped some of the losses it made after Standard & Poor's cut Japan's credit rating by a notch, while the euro …

The yen recouped some of the losses it made after Standard & Poor's cut Japan's credit rating by a notch, while the euro slipped from two-month highs today as players took profits from its recent rally.

The euro's hefty gains from a four-month low hit less than three weeks ago suggested it was ripe for profit-taking, but a mounting number of warnings on inflation by euro zone policy-makers is seen supporting the currency for now.

The dollar slipped to 82.70 yen from around 82.90 yen in late US trade, after initially rallying to as high as 83.22 yen yesterday.

"Although Japan has a huge fiscal problem, its debt is mostly financed domestically and the Japanese bond market is stable after the downgrade. So I don't think the downgrade will lead to continued selling in the yen," said Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp.

"But the yen might become more prone to selling in future, for instance if the government was unable to pass its budget for next fiscal year in time (by the end of March," she added.

In the currency market, the dollar/yen pair was overwhelmed by selling by Japanese exporters as well as speculative accounts that were quickly taking profits from the greenback's jump.

The dollar's quick retreat only cemented expectations among traders that its narrow 82.00-83.50 yen trading band will hold for now.

The yen also bounced against the euro, which ran into profit-taking after it hit a two-month peak of 114.02 yen yesterday, which marked a gain of 6.7 percent from a three-month low of 108.63 yen set on January 10th.

The euro last traded at 113.35 yen, down 0.5 percent on the day.

Against the dollar, the single currency fell 0.2 per cent, with market participants including an Asian sovereign player said to be taking profits in the pair following its 7.0 per cent rise from a four-month trough marked earlier this month.

The euro slipped to around $1.3710 from around $1.3730 in late US trade.

It went as high as $1.3760 on Thursday after European Central Bank policy-maker Lorenzo Bini Smaghi warned of a rising tide of imported inflation.

That was just the latest hawkish comment by ECB policy-makers to have given the market the clear impression that the bank is likely to tighten well ahead of the Federal Reserve.

The next chart barriers for the euro are the November 22nd high of $1.3786 and the peak from November 10th of $1.3826.

Breaks here could even unleash a further retracement to $1.4283 - a high hit right after the Fed announced a massive asset purchase programme.

"In the race towards a rate hike, the European Central Bank is going well ahead of the Fed. That points to a gradual decline in the dollar," said Katsunori Kitakura, chief dealer at Chuo Mitsui Trust and Banking.

While market players are aware that the problem of debt financing in some euro zone countries could linger, the euro zone no longer looks isolated in its suffering given the fiscal troubles in Japan and the United States.

Late yesterday, Moody's reminded investors that it might turn negative on its US rating outlook in the next two years, given how the country's budget deficit has continued to swell.

"Once this knee-jerk reaction (to Japan's downgrade) fades, the USD could be dragged down by its own fiscal concerns," said analysts at CitiFX in a note to clients.

Such perceptions may be behind the dollar's weakness, some market players said, as the the greenback stood near an 11-week low against a basket of major currencies.

The index stood at 77.786, having fallen to 77.594 yesterday, a level last seen in November.

The immediate focus will be on US data, including gross domestic product (GDP) due at 1330 GMT, which is forecast to have grown an annualised 3.5 per cent last quarter, up from 2.6 per cent the previous quarter.

A strong number could help the dollar against the euro.

It might also benefit risk trades in commodities and equities and growth-leveraged currencies such as the Australian and Canadian dollars, though recent falls in commodity prices have been sapping momentum for these currencies.

The Aussie dollar slipped 0.1 per cent to $0.9910, clinging above its 90-day moving average at around $0.9894.

"It looks like the current adjustment in precious metals is becoming a major correction. I suspect the Aussie will be under pressure for some time," said a European bank trader.

Gold hit a four-month low yesterday. Some emerging countries have seen sharp falls in share prices this month, to the detriment of growth-linked currencies such as the Aussie.

Reuters