Euro recovers in London

The euro rose on Thursday as buying by sovereign investors helped it recover from losses made after Standard & Poor's cut Spain's credit rating to just above junk. Signals from the International Monetary Fund - which has talked tough on the euro zone this week - that some of the bloc's struggling governments should be given more time to deal with their problems was also a positive for the euro.
But uncertainty over when Spain would seek a bailout and fresh concerns over Greece are likely to limit gains. The Spanish downgrade junk saw the euro fall to its lowest in more than a week at $1.2825 in Asian trade. It recovered to $1.2915, 0.3 percent higher on the day, rising past stop-loss orders above $1.2900 in the European session. Traders cited support at its 200-day moving average at $1.28233 with bids from Asian central banks reported at $1.2850.
"For us the $1.2830 level is a very key level and above $1.3000 we will look to sell," said Stuart Frost, head of Absolute Returns and Currency at fund managers RWC Partners. Euro/dollar implied volatilities are trading near their lowest in two years, with the one-month trading at around 8.4 vols. Volatilities, which reflect swings in financial asset prices, have been subdued for most of the year partly due to the aggressive flood of money from major central banks.
Investors have been on tenterhooks since the European Central Bank laid out a plan to buy the debt of countries like Spain last month that requires governments to first request aid. Earlier, IMF chief Christine Lagarde said heavily indebted European countries such as Greece and Spain should be given more time to cut their budget deficits.
"It takes away some of the tail risk attached to the euro that even the IMF is ready to give them a bit more time," said Arne Lohmann Rasmussen, head of currency research at Danske Bank. "That's one of the reasons why we like to buy the euro on dips." Against the yen, the euro was up 0.6 percent at 101.20 yen, having earlier hit a ten-day low of 100.16 yen. Near term support is seen at 99.64 yen, the low struck on September 27.
Speculation continued that the Bank of Japan may be set to take action to curb yen strength. BoJ Governor Masaaki Shirakawa said he will discuss the yen during talks on Japan's economic outlook at Wednesday's G7 meeting in Tokyo. "There's a lot of speculation over whether the Bank of Japan is moving in a more aggressive direction," Rasmussen said. The Australian dollar reversed earlier losses and climbed to its highest since October 2 at $1.0294, after the country's employment rose more than expected. Meanwhile, the Swedish crown fell to a three-month low against the euro after Swedish inflation data came in below expectations, supporting expectations a rate cut could be imminent.