* Euro seen likely to struggle after fall
* Sovereign debt woes haunt
* Dollar may gain on U.S. retail sales data
* Aussie rises after softer China CPI
By Hideyuki Sano
TOKYO, Feb 15 (Reuters) - The euro edged higher on Tuesday
but faced headwinds in moving further away from a three-week low
hit a day earlier when reports about ailing lender WestLB
triggered another outbreak of worries on euro zone debt and
banking problems.
Market players said the euro could slip back if upcoming U.S.
data, including retail sales figures later in the day, paints an
improving picture of the economy, which could push up U.S.
interest rates further to the detriment of the euro.
"The dollar is likely to be bought back more. Investors have
come to think that the Fed will not extend its quantitative
easing beyond June, and markets will try to bet on an eventual
rate hike by the Fed for now," said Etsuko Yamashita, chief
economist at Sumitomo Mitsui Banking Corp.
The euro ticked up in Asia as traders tried to take out
stop-loss orders around $1.3510-20, but lacked the momentum to go
further.
In late Asian trade, it traded at $1.3515 <EUR=>, about 0.2
percent higher than late U.S. levels. It hit a three-week low of
$1.3428 on Monday, when reports that rescue plans for WestLB were
under threat triggered selling in the currency. []
Talk of Asian central bank bids means immediate support for
the single currency lies under $1.3450 and below that, key
support now stands at $1.3360, the 50 percent retracement of a
January to February rally.
But many traders expect the currency to struggle to gain
traction amid the rekindled worries about the currency bloc's
debt and banking problems.
Peripheral euro zone yield spreads have been widening in the
past week on uncertainty over a rescue package for the region,
and there was some disappointment after a meeting of European
finance ministers on Monday.
The finance ministers agreed that a permanent rescue
mechanism to be set up from 2013 would total 500 billion euros,
but there was no agreement over how to beef up its existing
rescue fund. []
While policymakers have said they will hammer out a deal by
March, analysts noted that there are some political events that
could shake investor confidence on the euro in coming days.
They said a German local election on Feb. 20 could make
Berlin reluctant to dish out aid to indebted countries.
Ireland's main opposition party -- slated to win a Feb. 25
poll -- has warned that it could unilaterally restructure bank
debt, possibly imposing losses on senior bond holders, if it wins
power this month.
"I suspect the market is starting to worry about sovereign
issues. Euro long positions still remain to be unwound. The euro
could fall to around $1.32-33," said Minori Uchida, senior
analyst at the Bank of Tokyo-Mitsubishi UFJ.
The yield differential is also turning less favourable for
the euro.
Two-year German bonds yielded 0.54 percentage point more than
U.S. Treasuries -- the narrowest yield spread in nearly a month
and sharply below a two-year high of 0.82 percentage point hit
last last month.
SPREAD SHRINK
The spread shrank largely because U.S. yields jumped this
month and two-year U.S. yields <US2YT=RR> are near eight-month
highs.
Traders think a strong reading in U.S. retail sales due at
1330 GMT could fuel a rise in U.S. yields, thereby boosting the
dollar's rally. Retail sales, which have been a bright spot in
the economy, are expected to show a 0.6 percent rise in January
from the previous month.
"The greenback may regain its footing over the next 24 hours
of trading as the economic docket is expected to reinforce an
improved outlook for future growth," said David Song, currency
analyst at DailyFX.
"As market participants expect retail sales to increase for
the seventh consecutive month in January, the expansion in
private sector activity is likely to reinforce an enhanced
outlook for the world's largest economy as household spending
remains one of the leading drivers of growth."
Against the yen, the dollar gained 0.2 percent to 83.50 yen
<JPY=>, edging close to a three-week high of 83.68 yen set on
Friday.
The Bank of Japan kept rates on hold at the end of its
two-day policy meeting as widely expected. []
The Australian dollar rose 0.10 percent to $1.0037 <AUD=D4>.
It was helped by China's consumer price index that came in at 4.9
percent, below market expectations of 5.3 percent, though it was
exactly the same as a whispered number that swirled through
markets yesterday.
"The data probably slightly eases expectations of immediate
tightening, although in the overall scheme of things, this
doesn't change the fact that China is still in a tightening
phase," said SMBC's Yamashita.
(Additional reporting by Ian Chua in Sydney; Editing by Edwina
Gibbs and Joseph Radford)
