Dollar pares losses after Portugal auction
Analysts express uncertainty, doubt of further gains by the euro

By Deborah Levine and William L. Watts
March 9, 2011, 3:42 p.m. EST
MarketWatch

NEW YORK (MarketWatch) — The U.S. dollar pared losses against its major rivals Wednesday, following a brief rebound by the euro after Portugal sold two-year bonds, albeit at a hefty price.

The euro has gained 0.5% against the dollar this month as officials have hinted that rising oil prices pose a threat to inflation and will trigger an increase in Europe’s benchmark interest rates as soon as next month.

“The underlying signal is still one of euro resilience as it appears the interest-rate story continues to trump the debt-crisis story,” said strategists at Brown Brothers Harriman.

The dollar index (DXY 76.71, -0.09, -0.12%) , a measure of the U.S. unit against a basket of six major currencies, slipped to 76.718 from about 76.796 in North American trade Tuesday. It fell as low as 76.535 earlier.

The euro(EURUSD 1.3904, -0.0005, -0.0360%) rose as high as $1.3941 earlier, up from $1.3905 Tuesday, after analysts said the European Central Bank showed interest in purchasing peripheral euro-zone debt. The euro lately traded around $1.3907.

Versus the Japanese currency, the dollar(USDYEN 82.6300, -0.0100, -0.0121%) bought 82.67 yen, little changed from ¥82.66 Tuesday.

The dollar also fell to its lowest level against the Canadian dollar since November 2007. The greenback (USDCAD 0.9684, -0.0026, -0.2678%) lately bought 96.95 Canadian cents, down 0.2%. See more on Canadian dollar.

Late last week, renewed worries about debt problems on the euro-zone periphery served to cut short the euro’s push above the $1.40 level. On Wednesday, the 10-year Portuguese government bond yield neared 7.8%, its highest level since the launch of the euro, before an auction of two-year Portuguese government bonds.

In the auction, the Portuguese government sold 1 billion euros ($1.39 billion) of bonds, but at a sharply higher yield than a similar sale in September. The sale produced a yield of 5.99%, up from 4.09% in the September sale, but below the level seen in the secondary market for the same issue. Read more on Portuguese bond auction.

Portuguese bonds have been hit hard in recent weeks on rising expectations that Lisbon will be forced to seek an international bailout.

The auction “does nothing to convince anyone about Portugal’s longer-term sustainability in markets, but is perhaps slightly better than might have been expected,” said strategists at RBC Capital Markets.

The firm revised its forecast for the euro, saying it would fall less than previously expected because of an impending rate hike.

“There is a risk that, should peripheral debt issues come back to the fore, hikes turn from positive to negative for the currency,” analysts led by Adam Cole wrote in a note. Read more on RBC’s euro forecast.

Other peripheral euro-zone government bond yields also rose Wednesday. Analysts cited ongoing concerns that Friday’s meeting of euro-zone leaders will fail to produce a breakthrough in efforts to find a lasting solution to the sovereign-debt crisis, as well as fears that a fresh round of European bank stress tests will repeat widely criticized shortcomings of last year’s tests. Read about worries over European stress tests.

Rate markets are pricing in as many as six rate hikes by the ECB by the end of 2012, said Dan Greenhaus, chief economic strategist at Miller Tabak. That would suggest the euro could rise to $1.45 or $1.50, he said.

“Despite these forecasts, it is very difficult to say with any certainty that as many as six rate hikes will occur by the end of 2012,” Greenhaus said. “Bond spreads across the periphery show no signs of improvement and there is a fair bit of uncertainty“ about the region’s bailout plans.

Regarding a broader meeting of officials at the end of the month, “we doubt any decisions will fully satiate markets,” he said.

On a technical note, the euro has managed to hold support at the $1.3860 level. Technical and short-term traders are looking for a punch through that area to trigger a further drop in euro/dollar, while a squeeze back above $1.40 “would change their minds,” said W. Brad Bechtel, managing director at Faros Trading in Stamford, Conn.

U.K. pound, data

The British pound (GBPUSD 1.6198, +0.0039, +0.2414%) rose to $1.6184, up from $1.6159.

The Office for National Statistics said the U.K. goods trade deficit narrowed to 7.1 billion pounds ($11.5 billion) from an upwardly revised £9.7 billion in December. Economists had forecast a trade gap of £8.6 billion.

The figure marked the biggest one-month improvement in the trade position since the current series began in 1980, suggesting that the previous month’s record deficit was an aberration, wrote economists at Barclays Capital.

However, analysts also noted weak data from retailers.

“The deterioration being seen in the retail sector, with many of the U.K. retailers warning of tough times ahead, should limit a GBP rebound,” analysts at BNP Paribas wrote in a note.

Deborah Levine is a MarketWatch reporter, based in New York. William L. Watts is a reporter for MarketWatch in London.

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