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Euro gains after solid Irish, Spanish bond sales

Ireland’s sale of 2014 and 2020 paper was viewed as a litmus test for investor appetite amid concerns about the cost of cleaning up its banking sector. Sales of 12- and 18-month Spanish treasury bills also met strong demand.

But the euro struggled to hold above $1.29 on uneasiness about the economic outlook, with a key German survey sparking concerns about whether Europe’s largest economy can sustain a solid recovery.

The German ZEW institute’s measure of investor and analyst sentiment dropped well below forecasts, though this was partly offset by an unexpectedly sharp jump in the current conditions index.

“Net-net the bond auctions and some positive aspects to the data have added to the positive tone on the euro today,” said Lauren Rosborough, currency strategist at Westpac.

At 1115 GMT, the euro was up 0.3 percent at $1.2860, with key support at a one-month low around $1.2732 hit on trading platform EBS on Monday, traders said.

The euro rose to the day’s high of $1.2915 after the auction results as stop-losses were hit on the break of $1.2910.

“The much weaker-than-expected ZEW, which likely reflects renewed volatility in asset markets, will make it difficult for the euro to sustain gains,” said Ian Stannard, senior currency strategist at BNP Paribas.

Ireland comfortably sold its allocation of 2014 and 2020 bonds at bid-to-cover ratios of more than three times, easing concerns about funding which had been worrying investors of late. The yield on the 10-year paper fell from the last tender a month ago.

Yen gains limited for now

U.S. stock futures rose around 0.6 percent in spite of underlying concerns about the global economic outlook and threat of deflation which hurt riskier assets in the previous session.

The euro rose 0.2 percent against the yen to 109.73 yen after an early fall as low as 109.07 yen.

The dollar stood at 85.34 yen after sliding to 85.11 yen in Asian trade, nearing a 15-year low of 84.72 yen hit last week.

Its fall came in the wake of Monday’s slide in U.S. Treasury yields, given the strong correlation between U.S.-Japanese government bond yield spreads, which have been narrowing, and the dollar/yen rate.

Selling by Japanese exporters also weighed on the dollar, traders said. Japanese exporters have been hurt more by the fall in euro/yen, as they had been setting their budget targets around 120-130 yen per euro this year.

But further yen gains were capped by concerns about possible moves by Japanese policymakers to stem the yen’s rise. A government source said Prime Minister Naoto Kan and the central bank governor were likely to meet next Monday.

When asked about the meeting, Kan told reporters: “We have been communicating with the BOJ in various ways as needed. We hope to continue communicating as necessary with the central bank.”

One-week implied volatility for dollar/yen fell to around 11.15 on Tuesday from above 12 percent last week.

Adam Cole, global head of FX strategy at RBC Capital Markets, said: “If no physical intervention or no stronger threat of intervention comes by the end of the week, then players will start to take the yen higher.”