* Euro backs off 2-mth high vs dollar, support at $1.3585
* Stop-loss hunting in euro/dlr after EFSF, Spain auctions
* Sterling tumbles after UK Q4 GDP shrinks unexpectedly
By Tamawa Desai
LONDON, Jan 25 (Reuters) - The euro came off a two-month
high on Tuesday as the euro zone rescue fund's first offer of
debt attracted strong demand as expected, while the pound dived
after a shock contraction in the UK economy last quarter.
Speculation about potential interest rate increases in the
euro zone and Britain eased as the poor UK GDP data switched
investors' focus to worries about growth rather than inflation.
The order book for the European Financial Stability
Facility's (EFSF) inaugural debt issue closed with bids valued
at 43 billion euros for the 5 billion euros of paper on offer, a
source at the EFSF said. []
Speculation the new issue would be massively oversubscribed
boosted the euro in early trade, but it was unable to extend
gains on the results as they did little to increase optimism for
a comprehensive solution to euro zone debt problems.
"Some positives had been priced in yesterday on news about
the size of the order books going into the issuance (so) today's
news adding to that was not a massive positive for the euro,"
said Valentin Marinov, currency strategist at Citi.
Expectations the European Central Bank would lift interest
rates before the U.S. Federal Reserve have underpinned the
single currency this month due to tough talk on inflation and
interest rates by ECB chief Jean-Claude Trichet.
By 1149 GMT, the euro was trading 0.1 percent lower at
$1.3635 <EUR=>, easing from an earlier high of $1.3688 on
trading platform EBS. Traders cited selling by macro funds, a
German bank and Asian central banks.
Initial support was seen around $1.3585, a key trendline off
the January lows, traders said.
Traders said the euro would need to hold above $1.3570 -- a
50 percent retracement of its decline from November to early
this month -- on a sustained basis to extend its gains.
Sterling tumbled after a surprise 0.5 percent contraction in
fourth quarter UK GDP due to adverse weather, compared with
economists' forecasts of a 0.5 percent gain [].
The pound fell as much as 1.4 percent against the dollar to
a session low <GBP=D4> of around $1.5750. The euro rose to 86.36
pence <EURGBP=D4>, its highest in three weeks.
"The UK GDP may be a warning sign of what is to come in
Europe. Market participants may reassess the rate hike scenarios
which had led to a short squeeze," said Lee Hardman, currency
economist at Bank of Tokyo-Mitsubishi UFJ.
Some economists said the surprisingly poor reading suggested
the Bank of England would be much more cautious about the threat
of lasting inflation, which would weigh down the UK currency.
Others argued the impact of persistent price pressures on a
weak economy would heighten the risk of stagflation, which would
also be negative for sterling.
The Swiss franc rallied broadly, rising sharply against the
euro <EURCHF=> and the pound <GBPCHF=>. The euro fell 0.4
percent to around 1.2870 francs due to position adjustments,
with near term support around 1.2670, the low hit on Jan. 18.
DEBT AUCTIONS
Markets offered limited reaction to strong results at an
auction of Treasury bills in Spain, which added to signs that
perceptions of weaker euro zone economies are improving.
[]
Analysts said Tuesday's successful issuances were not enough
to instil more optimism into the euro. "Ultimately the auctions
did not significantly change the picture for the euro," one
London-based trader said.
The dollar index <.DXY> rose 0.1 percent to 78.14, coming
off a 2-1/2 month low of 77.814 hit on Monday.
The dollar was down slightly at 82.35 yen <JPY=>, unaffected
after the Bank of Japan kept its policy unchanged as expected.
The Australian dollar <AUD=D4> eased versus the U.S. dollar
as risk appetite receded and on lower-than-expected Australian
consumer inflation data.
(Additional reporting by Naomi Tajitsu; Editing by Catherine
Evans)
