* Euro up 0.3 at $1.2860 <EUR=>, off 7-wk lows vs yen
* Solid demand at Irish, Spanish bond auctions
* Headline ZEW well below forecasts, current conditions up
* Trader wariness keeps yen gains limited for now
(Updates prices, adds quote, detail)
By Tamawa Desai
LONDON, Aug 17 (Reuters) - The euro rose against the dollar
and came off 7-week lows against the yen on Tuesday, helped as
solid results at Irish and Spanish bond auctions alleviated
concerns about heavily indebted euro zone countries.
Ireland's sale of 2014 and 2020 paper was viewed as a litmus
test for investor appetite amid concerns about the cost of
cleaning up its banking sector. Sales of 12- and 18-month
Spanish treasury bills also met strong demand. []
But the euro struggled to hold above $1.29 on uneasiness
about the economic outlook, with a key German survey sparking
concerns about whether Europe's largest economy can sustain a
solid recovery.
The German ZEW institute's measure of investor and analyst
sentiment dropped well below forecasts, though this was partly
offset by an unexpectedly sharp jump in the current conditions
index. []
"Net-net the bond auctions and some positive aspects to the
data have added to the positive tone on the euro today," said
Lauren Rosborough, currency strategist at Westpac.
At 1115 GMT, the euro was up 0.3 percent at $1.2860, with
key support at a one-month low around $1.2732 hit on trading
platform EBS on Monday, traders said.
The euro <EUR=> rose to the day's high of $1.2915 after the
auction results as stop-losses were hit on the break of $1.2910.
"The much weaker-than-expected ZEW, which likely reflects
renewed volatility in asset markets, will make it difficult for
the euro to sustain gains," said Ian Stannard, senior currency
strategist at BNP Paribas.
Ireland comfortably sold its allocation of 2014 and 2020
bonds at bid-to-cover ratios of more than three times, easing
concerns about funding which had been worrying investors of
late. The yield on the 10-year paper fell from the last tender a
month ago.
YEN GAINS LIMITED FOR NOW
U.S. stock futures <DJc1> <SPc1> rose around 0.6 percent in
spite of underlying concerns about the global economic outlook
and threat of deflation which hurt riskier assets in the
previous session.
The euro rose 0.2 percent against the yen to 109.73 yen
<EURJPY=R> after an early fall as low as 109.07 yen.
The dollar <JPY=> stood at 85.34 yen after sliding to 85.11
yen in Asian trade, nearing a 15-year low of 84.72 yen hit last
week.
Its fall came in the wake of Monday's slide in U.S. Treasury
yields, given the strong correlation between U.S.-Japanese
government bond yield spreads, which have been narrowing, and
the dollar/yen rate.
Selling by Japanese exporters also weighed on the dollar,
traders said. Japanese exporters have been hurt more by the fall
in euro/yen, as they had been setting their budget targets
around 120-130 yen per euro this year.
But further yen gains were capped by concerns about possible
moves by Japanese policymakers to stem the yen's rise. A
government source said Prime Minister Naoto Kan and the central
bank governor were likely to meet next Monday. []
When asked about the meeting, Kan told reporters: "We have
been communicating with the BOJ in various ways as needed. We
hope to continue communicating as necessary with the central
bank." []
One-week implied volatility for dollar/yen <JPY1MO=> fell to
around 11.15 on Tuesday from above 12 percent last week.
Adam Cole, global head of FX strategy at RBC Capital
Markets, said: "If no physical intervention or no stronger
threat of intervention comes by the end of the week, then
players will start to take the yen higher."
(Additional reporting by Jessica Mortimer; editing by Chris
Pizzey)
