* Euro off early high, good support under $1.36
* IMM position suggests rally likely to slow but not stop
* Fall in euro zone credit spreads contrasts with U.S.
* Rising interest rate gaps help euro
By Hideyuki Sano
TOKYO, Jan 24 (Reuters) - The euro backed off a nine-week
high on Monday with sharp gains of the past two weeks on easing
worries about euro zone debt inducing profit-taking, while more
neutral market positioning may make its advance milder.
The euro held above key resistance around $1.3570 that it
broke on Friday, a 50 percent retracement of its decline from
November to early this month, as data showed speculators have
closed all their bets against the currency.
Speculators turned long on the euro for the first time in two
months in the week ended Jan. 18 while doubling their bets
against the greenback, figures from the Commodity Futures Trading
Commission showed on Friday.
"After speculators flip their positionings, they tend to
build up more of their new positions for some time. So the euro
still looks to be on a rising trend to me," said a trader at a
Japanese bank.
The euro fetched $1.3610 <EUR=>, having briefly hit a fresh
two-month high of $1.3648 in early Australasian trade on Monday,
slightly below $1.3620 late in New York on Friday.
The currency piercing resistance around $1.3570 brings into
view $1.3740, a 61.8 percent retracement of its decline from
November to early this month.
The euro has rallied some 6 percent in the past two weeks
thanks to a mixture of demand from Asian central banks, easing
worries over euro zone debt and increasing international support
for the euro zone's rescue plan.
But as the commodities commission data shows, speculators no
longer have short positions that need to be closed, so the euro's
momentum is likely to slow, some market players said.
"As we can't expect more short-covering, the euro no longer
has an engine for its rally," said a trader at a Japanese
brokerage.
In the options market, one-month implied volatility on the
euro/dollar fell to its lowest level in more than three months in
another sign of rising expectations that any further rise in the
euro will be slower rather than faster.
Thus the news that Ireland's junior coalition party withdrew
from Prime Minister Brian Cowen's government on Sunday, hastening
an election, was enough to trigger profit-taking.
Still, euro bears were wary of becoming too negative, having
been badly burnt in the last couple of weeks.
"I don't think sovereign debt problems will go away but the
thing is Europe does have a safety net already," said Minori
Uchida, a senior analyst at Bank of Tokyo-Mitsubishi UFJ.
"And on the other hand it is not as if the U.S. doesn't have
fiscal problems. Its deficit is widening sharply on planned tax
cuts and the finances of many of its states are strained. I
suspect there will be a time later this year when the market will
focus on U.S. debt problems," he said.
The premium on 10-year credit default swaps on U.S. sovereign
debt <USGV10YEUAC=MP> hit a near two-year high last week and U.S.
municipal bonds have been under pressure for some time.
While the level of the credit spread on U.S. sovereign debt
is still low, its recent rise contrasted with a fall in credit
spreads in Italy, Spain and Portugal in the past couple of weeks.
The euro drew additional help from tough talk on keeping
inflation in check from European Central Bank chief Jean-Claude
Trichet.
In an interview with the Wall Street Journal on
Sunday, Trichet said core inflation was not a good gauge of
future price pressures and that the central bank was ensuring
higher energy prices do not seep into other prices.
In contrast, the Federal Reserve is more worried about
reviving the job market and the Fed statement on Wednesday is
likely to give only a sober assessment of the sluggish recovery.
This has helped drive euro zone benchmark German 2-year
yields to one-year highs and pushed its spread to the
equivalent U.S. yield to the widest in about two years, making
the euro more attractive against the dollar for some investors.
Against the yen, the single currency was at 112.50 yen
<EURJPY=R>, having hit a two-month high of 112.63 in choppy early
trade and rising above its 200-day moving average for the first
time in over a year.
Against the Swiss franc <EURCHF=R>, the euro also held near
Friday's 1-1/2-month high of 1.3068 franc, standing at 1.3041.
The common currency also hit a two-month high against the
Australian dollar <EURAUD=R> near A$1.38.
"We'll be watching to see if this momentum remains in place.
With periphery issues no longer fully offsetting the improving
(at least in Germany) macro backdrop, watch the deck of euro
zone PMIs due on Monday," said David Watt, strategist at RBC
Capital Markets.
Data last Friday showed German business morale rose to its
highest level since records started for reunified Germany at the
start of 1991 German reunification, surging past economists'
forecasts. []
The euro's rebound has left the dollar languishing near
two-month lows against a basket of major currencies. The dollar
index last traded at 78.256, not far from a two-month low of
78.096 hit on Friday.
The dollar bought 82.75 yen <JPY=>, trapped in a range
roughly between 81 yen and 84 yen seen so far this month.
The Australian dollar slipped 0.2 percent to $0.9878
<AUD=D4>, dented by lower-than-expected Australian producer
prices. []
(Additional reporting by Ian Chua in Sydney; Editing by Michael
Watson)
