The euro was poised for its biggest daily rally against the dollar in almost eight months on Monday, after Spain secured help for its debt-stricken banks and as Chinese economic data was not as bad as the market had feared.
The euro zone decided to lend its fourth-largest economy up to 100 billion euros ($125 billion) to reassure investors and prevent the threat of a bank run in case Greece’s crisis heats up again after elections this coming weekend.
This saw the euro spike almost 1 percent to $1.2635, pulling away from a near two-year low of $1.2288 hit earlier this month. Early in the session, it rose as high as $1.2672 on stop-loss buying, hitting its highest level since May 23.
“Euro zone leaders rose to the occasion. They had no choice. The Spanish bailout means Europe will not permit ‘runs’ to sink their banking system,” said David Kotok, chairman of Cumberland Advisors.
Against the yen, the single currency also rose as high as 100.90 yen, its highest level in more than two weeks to last settle around 100.60, still up 1.2 percent on the day.
“The market welcomed the fact that the euro zone took pre-emptive steps. The amount of support is big enough to satisfy investors,” said Yunosuke Ikeda, senior strategist at Nomura Securities.
Chartists said the euro could rise to around $1.2837, its 50 percent retracement of its decline from March peak of $1.3386 to a two-year low of $1.2288 hit on June 1. For now, it was ensconced between bids at 1.2610 and offers at 1.2670.
A string of Chinese economic data released over the weekend, while showing the extent of the country’s economic slowdown, was not as bearish as many traders had feared, following Beijing’s first interest rate cut since the global financial crisis on Thursday.
DEVIL IN DETAILS
Traders warned, however, that the optimism may be temporary, given caution ahead of Greek elections on June 17. Parties that support and oppose the debt-stricken country’s international bailout are neck-and-neck in opinion polls.
In addition, some analysts also noted that terms of the Spanish deal are not clear, suggesting there could be tussles on details of the bailout even after the overall agreement, as has been the case with other rescue packages.
“If the euro zone will have much looser conditions for Spain, then countries like Ireland will probably call for the same conditions as well. It’s not going to be easy to decide on those details,” said Seiya Nakajima, chief economist at Itochu Corp.
Underscoring the prevailing bearish sentiment, bets against the euro surged to a record high in the latest week, while net long U.S. dollar positions extended gains, according to the Commodity Futures Trading Commission.
Net euro shorts totaled 214,418 contracts, from net shorts of 203,415 the previous week, the data showed, increasing the risk of short-covering bouts in the single currency.
In line with other riskier assets, the Australian and New Zealand dollars were also higher early on Monday, with the Aussie briefly emerging above parity versus the U.S. dollar for the first time in about a month.
It was last up 0.6 percent on the day at $0.9975, with support sitting around the June 8 low of $0.9820.
As risk currencies were on the offensive, the dollar index – a gauge of the greenback’s performance against a basket of major currencies – fell 0.8 percent to a 2-1/2-week-low of 81.868 .
The dollar held its ground against the yen at 79.62 yen, as both safe-haven currencies suffered heavy losses on the back of the relief rally in riskier assets. Offers from Tokyo exporters capped the dollar’s gains below 80.00 yen.
Traders said there were large stop-loss orders looming above the resistance at the 100-day moving average of 80.21.
Australian data, which normally moves markets during Asian trading hours, this week includes business and consumer confidence readings, and the Australian central bank’s governor is scheduled to speak at an economic forum on Wednesday.
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