* Euro retains gains as concerns about euro zone debt ease
* Strong response to Spanish auctions supports high-yielders
* Dollar index vulnerable on the charts, soft vs Swissie
By Satomi Noguchi
TOKYO, June 18 (Reuters) - The euro held at three-week highs
on Friday, on track for its second straight week of gains, while
the dollar appeared vulnerable to further losses after falling
below a key chart level.
The euro retained gains near $1.24 as investors liquidated
short positions after solid demand at Spanish bond auctions,
which also encouraged some investors to shift funds back to euro
zone bonds from safe-haven U.S. Treasuries, traders said.
Peripheral European debt markets calmed after the auction,
whetting investors' appetite for riskier assets and supporting
higher-yielding currencies like the Australian <AUD=D4> and New
Zealand dollars <NZD=D4> which touched one-month highs.
"While the news flow out of Europe started the week negative,
a good Spanish bond auction overnight and the potential for a
coordinated bank stress test across the euro area ... has
bolstered investor confidence that European officials are
beginning to get things right," Barclays Capital said in a note
to clients.
The euro <EUR=> rose as far as $1.2414, a three-week peak,
and held at $1.2400 after gaining 0.6 percent on Thursday.
It has advanced more than 2 percent so far this week,
overcoming a Moody's downgrade of Greece's credit rating to junk
status and pulling further away from a four-year low of $1.1876
struck on June 7.
Traders said there were some light stops lined up above the
day's high, with near-term resistance at $1.2457, the single
currency's 2009 low hit during the global financial crisis.
The spread between Spanish government bond yields and
benchmark German Bunds narrowed from a euro lifetime high after
Thursday's auction.
The euro was also being helped by broad dollar weakness after
a rise in jobless claims and weaker-than-expected manufacturing
data on Thursday prompted investors to scale back expectations of
a rate hike by the Federal Reserve. []
"I still think the euro is a sell into rallies and I expect
it to see resistance at $1.25," said Gregg Gibbs, currency
strategist at RBS, Sydney.
European leaders agreed on Thursday to publish details of
stress tests showing the financial health of individual banks
next month and to toughen budget rules to restore confidence in
their currency union. []
Some market players believed the release of stress tests
would boost investor trust in European banks, but others were
concerned they could reveal fragility in the sector and hurt the
euro.
The dollar index <.DXY> was at 85.57, down 0.1 percent after
brushing a one-month low at 85.491. Technically it looked
vulnerable to a further fall after it broke through support at
85.85, with traders and analysts citing the 85.13 area -- its May
21 low -- after a bearish reversal in the previous session.
"If that level goes, then you'll probably see a bit more
capitulation (from dollar longs) on that front," said Sue Trinh,
senior currency strategist at Royal Bank of Canada in Hong Kong.
The dollar was marginally lower at 90.88 yen <JPY=>, having
fallen 0.5 percent in the previous session after the
weaker-than-expected U.S. data.
Trinh said there was some talk of stop-loss sell orders below
90.75 yen.
The Japanese government in its economic growth strategy
called on the Bank of Japan to "do its utmost" to beat deflation
and said fiscal and monetary policies for ending price falls
should help the country avoid excessive rises in the yen.
[]
Analysts said the wording on the forex policy may have
sounded less aggressive than expected for some market players who
had expectations for drastic steps to weaken the yen, helping the
yen's rise. But the overall reaction was limited, traders said.
The Swiss franc <CHF=> was also firm, having rallied after
Switzerland's central bank backed off its pledge to fight
excessive currency strength now that deflation risks have
receded. For details, see []
The dollar held at 1.1114 francs after revisiting a one-month
low of 1.1095. The euro was slightly lower <EURCHF=> at 1.3775
francs, not far from a record low of 1.3735 on EBS hit on June 9.
Meanwhile, the Australian dollar was up 0.2 percent at
$0.8693 <AUD=D4>, after touching a one-month high at $0.8714,
boosted by better risk appetite. The NZ dollar likewise was
holding just below a one-month high of $0.7068.
(Additional reporting by Anirban Nag in Sydney and Charlotte
Cooper in Tokyo; Editing by Joseph Radford)
