Euro rally pauses

The euro traded little changed against the dollar on Tuesday, taking a breather after a two-day rally sparked by expectations of further action by the European Central Bank to lower borrowing costs for Spain and Italy. The Australian dollar rose to its highest in more than four months against the greenback after the country's central bank kept interest rates unchanged at 3.5 percent and dropped few hints about easing soon.
Rising expectations that the ECB could step in as early as next month to reduce crippling high Spanish and Italian borrowing costs by buying their bonds have sparked a global rally in risky assets since Friday. "The euro's getting a lift because there are some plans coming forward from the ECB to help ease the debt crisis," said Brian Kim, currency strategist at RBS Securities in Stamford, Connecticut.
The euro was little changed at $1.2399, pulling away from a one-month high of $1.2443 set on Monday. Traders reported talk of resistance at $1.2450. Intraday bias in the euro remains on the upside, with the next target at around $1.2764, the 50 percent retracement of the move from the $1.3486 high hit in late February to $1.2040, the more-than-two-year low struck on July 24.
Markets were initially disappointed last week when the ECB failed to take immediate action to stabilize bond markets. But traders took ECB chief Mario Draghi's warning not to bet against the euro seriously and as a result the euro has gained momentum. Italian Prime Minister Mario Monti's victory on Tuesday in a vote of confidence on a bill that would cut spending to rein in the deficit also helped the euro.
But uncertainties remained. There were concerns about the potential for opposition from Germany, the euro zone's largest country, to any large-scale bond-buying program. "Skeptics remain and the ECB will have to replace rhetoric with action sooner (rather) than later for this upward move to gain any momentum," said Matthew Lifson, senior trader and analyst at Cambridge Mercantile Group in Princeton, New Jersey.
The euro rose to 1.20928 francs after 2000 GMT on Monday from around 1.2015 in a matter of minutes on EBS as the algorithmic orders were executed. The euro soon dropped back down and on Tuesday was last at 1.2013 francs, continuing to hold just above the Swiss National Bank-imposed floor of 1.20 francs. The Australian dollar hit a high of $1.0604, its strongest since March 20, before retreating to $1.0553, down 0.1 percent. The Reserve Bank of Australia kept interest rates steady and appeared in no hurry to cut borrowing costs again. The dollar rose 0.5 percent to 78.62 yen, staying above a two-month low of 77.90 yen struck last week.