Euro reverses losses in London

The euro recovered early losses on Friday in thin trade, gaining momentum on stop-loss selling, but remained at risk of coming under renewed pressure from a darkening global economic outlook and worries the eurozone banking sector could face more funding pressures. The single currency rose to a session high of $1.4404, having earlier fallen to a low of around $1.4258 as European shares suffered heavy losses.
It was last trading up 0.4 percent on the day at $1.4388. The Swiss franc edged up, benefiting from demand for currencies perceived to offer a safe haven, although its gains were capped by ongoing speculation Swiss authorities will again step in to rein in the currency.
Investors have been dumping higher-risk assets after weak US economic data on Thursday added to the view the global economic recovery is stuttering, while concerns that eurozone policymakers are dragging their feet over the region's debt problems are also expected to weigh on the single currency. Some market participants said demand from Russian investors, and market chatter that the European Central Bank was buying Italian bonds also helped the euro pare losses.
The dollar index slipped 0.4 percent to 73.921 as a result of the euro's rebound. Many analysts expect the dollar, which has also struggled due to US fiscal problems, will be supported on the view that demand for the world's most liquid currency will rise if signs grow that financial institutions may be facing funding problems. "Funding pressures are definitely visible in the euro area because of the vicious circle between the sovereign debt crisis and the knock-on effects on the financial system due to eurozone banks' holdings of sovereign debt," said Raghav Subbarao, currency strategist at Barclays Capital.
Analysts said investors were becoming highly sensitive to signs of funding strains, following news earlier in the week that an unnamed eurozone bank had borrowed $500 million in one-week funds from the European Central Bank. That has sent interbank lending rates soaring with the US dollar Libor/OIS spread blowing out to 21 basis points, the highest level in 12 months. Three-month Libor struck 4-1/2-month highs at 0.30300 percent, up from 0.29778 percent on Thursday.
Other signs of possible funding issues were highlighted by news the Swiss National Bank (SNB) had tapped its currency swap line with the Federal Reserve in the past week. This was the first time the Fed has provided liquidity to a foreign central bank since early March.
The euro was last down 0.2 percent on the day against the Swiss franc to 1.1357 francs, having earlier fallen roughly 1 percent in choppy trade. The dollar was down 0.2 percent at 76.46 yen, regaining ground after earlier slipping to 76.31, within a whisker of its all-time low of 76.25 yen and spurring speculation that Japanese authorities may enter the market to stem the currency's strength.