The euro edged higher on Tuesday, pulling away from recent three-week lows against the dollar on growing signs that Spain is ready to seek a bailout. But uncertainty over the timing of the request kept investors on edge with many selling the euro at higher levels. Another risk factor is rating agency Moody's soon-to-be announced review of Spain's rating, which could see it cut to junk status.
The growth-linked Australian dollar fell to a four-week trough against the US currency and slid against the euro after the country's central bank cut interest rates by a quarter point and left the door open for more easing. Analysts said safe-haven currencies like the US dollar and the yen would be in demand until Madrid asked for aid. But a bailout request - and expectations that would be followed by the European Central Bank buying Spanish government bonds to cut borrowing costs - would push the euro and riskier assets higher.
The euro was 0.2 percent higher on the day at $1.2920, pulling away from Monday's low near $1.2804 on trading platform EBS, its lowest level in three weeks. Market players reported bids from Asian central banks at around $1.2880 with offers to sell at $1.2950, confining the currency to a range.
It has eased from a four-month peak of $1.31729 hit in mid-September after the ECB announced its bond-buying plan to lower peripheral debt yields and the US Federal Reserve teed up another round of monetary easing. While a request for a bailout by Spain could see a short-term rally in the euro, some money managers are wary of the single currency in the medium to long term, given gloomy economic prospects, tough austerity measures and rising unemployment in the euro zone.
"From a macro perspective, we would look to short the euro against the dollar into any move higher as there is no growth in the euro zone," said Howard Jones, adviser at RMG Wealth Management. Against the yen, the euro was 0.5 percent higher at 100.95 yen. The dollar rose 0.2 percent against the Japanese currency to 78.10 yen, having hit a one-week high of 78.215 on EBS.
The Aussie dollar fell 0.6 percent to $1.0291, its lowest level since early September, weighed down by the Reserve Bank of Australia rate cut and concerns about slowing growth in China. The euro climbed around 0.8 percent to A$1.2540. While the cut, to 3.25 percent, was not a complete surprise, some analysts had thought Australia's central bank would wait until November to lower interest rates.
Daniel Martin, Asia economist for Capital Economics in Singapore, said that while another cut could not be ruled out, the RBA would probably keep rates on hold from here until late 2013 or maybe longer. Other analysts saw it differently, and interest rate derivatives showed investors were looking for more cuts. Overnight index swaps, which show where the market thinks the cash rate will be over time, have 2.75 percent inked in on a 12-month horizon.
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