FOREX-Euro gains vs dollar in Q1, but debt fears persist
* ECB rate hike seen next week but future pace questioned
* Peripheral debt issues seen weighing on euro 2nd qtr
* EUR/USD 1-month implied vols down, but 1-year elevated (Adds comments, updates prices, changes byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, March 31 (Reuters) – The euro advanced in the first quarter, boosted by expectations of euro zone rate hikes following Thursday’s strong inflation numbers, but gains could stall in the next few weeks due to nagging peripheral debt concerns.
Technical indicators suggested the euro was in the midst of a correction to the downside against the dollar after gaining 6 percent in 27 days from the currency’s low of $1.3428 on Feb. 14 to last week’s high at $1.4249.
The $1.4249 level is the pair’s resistance, and if that goes, euro bulls could target $1.4283, the Nov 4 peak.
On the way down, analysts said a strong break below the key $1.4000 psychological level would signal a shift in the euro’s uptrend, with downside support at $1.3850.
More importantly, the fundamental outlook for the euro zone remains cloudy, particularly at the periphery, even though an interest rate increase seemed imminent at a European Central Bank monetary policy meeting next week.
“In our view, the euro will weaken on a longer-term horizon … There’s an awful lot of (rate hikes) priced in at the moment and that’s because of the change in language from ECB President (Jean-Claude) Trichet,” said Frances Hudson, investment director for strategy at Standard Life Investments in Edinburgh.
Standard Life has assets under management of about $214 billion and the firm maintains a long dollar/short euro position in its Global Absolute Return Strategy portfolio.
“If the ECB does hike, they would not hike massively. One percent to 1.25 is not a big leap. After the first move, they will wait and give it time and see what happens,” Hudson said.
The latest challenge to the euro zone was a bank stress test in Ireland released on Thursday, which indicated that the country’s banks need another 24 billion euros in capital to plug potential losses. For more, click on [ID:nLDE72U2EF].
Analysts said the capital requirements would be tough to meet and at some point the Irish government would have to restructure the whole banking industry. This should weigh on the euro as it begins the second quarter.
In early afternoon trading, the euro rose 0.5 percent to $1.4194 EUR=EBS. It has gained more than 6 percent against the dollar and 8.5 percent against the yen in the first quarter, largely due to the outlook that the ECB would raise rates well before the Federal Reserve and the Bank of Japan. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Asset returns in Q1 2011 graphic: r.reuters.com/wur78r Key events in Q1 2011 timeline: r.reuters.com/saj68r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
From www.reuters.com
