* Euro falls to $1.2860 on EBS, more losses seen
* Portugal under pressure to accept financial aid package
* Bond auctions in Spain, Italy, Portugal under scrutiny
(Recasts lead, adds detail, updates prices)
By Wanfeng Zhou
NEW YORK, Jan 10 (Reuters) - The euro reversed losses on
Monday that had driven it to a four-month low against the
dollar, though gains were expected to be short-lived amid
worries about the ability of indebted euro zone countries to
raise funds and speculation that Portugal will need a bailout.
The recovery in the euro, which fell as low as $1.2860
<EUR=EBS> on trading platform EBS, was partly helped by gains
versus the Swiss franc on speculation the Swiss government may
take measures to rein in currency strength.
"We see a further escalation in the European debt crisis,
and a substantially weaker euro," said Stephen Jen, managing
director of macroeconomics and currencies at BlueGold Capital
Management LLP in London. "There is no silver bullet because
the underlying problems are 'knotted.'"
Analysts said the euro's close below its 200-day moving
average last week at $1.3075 was particularly bearish. The next
key downside support lies at $1.2795, the 61.8 percent
Fibonacci retracement of its rally from June to November.
A senior euro zone source told Reuters on Sunday pressure
was growing on Portugal from Germany and France to seek
financial help from the European Union and International
Monetary Fund to prevent the debt crisis spreading. Germany
denied the report.. See [] []
Portugal, Italy and Spain are all due to tap the bond
market for funds this week, and investors were nervous about
whether these highly indebted countries will be able to raise
funds at sustainable levels in 2011. See []
The euro <EUR=> last traded up 0.3 percent at $1.2953,
though it remained down about 3.3 percent in the first six
trading sessions this year. Traders reported option barriers at
$1.2850 and sovereign buy orders just above that level.
Against the Swiss franc, the euro rose 0.3 percent to
1.2526 francs. <EURCHF=EBS> The Swiss currency weakened after a
report said the Swiss government will meet business leaders and
trade unions next week to discuss the implications of the
record-strong Swiss franc. []
"You could argue the euro is a little bit oversold on the
short term," said John McCarthy, director of foreign exchange
trading at ING Capital Markets in New York. "There's been a
little bit of euro buying and profit-taking on short euro
crosses. But the euro is still relatively well offered. There's
obviously renewed concern about Portugal."
PORTUGAL IN FOCUS
The growing pressure on Lisbon follows a sharp rise in
Portuguese 10-year bond yields at the end of last week to euro
lifetime highs above 7 percent, as investors worried about the
prospect of up to 1.25 billion euros of bond supply Portugal
will offer at an auction on Wednesday.
Analysts said that if investors judge that the price Lisbon
needs to pay to get funds is too high to sustain borrowing in
the long term, Portuguese bonds may sell off quickly, forcing
the country to seek emergency EU and IMF funds.
You-Na Park, currency strategist at Commerzbank, said
there's a "realistic possibility" that Portugal will not manage
to generate the funds required for 2011 without foreign aid.
But she added, "Even if Portugal does seek a bailout, the
market may well turn on Spain as the next candidate."
Kathleen Brooks, research director at FOREX.com, said
there's a risk the euro could revisit the low $1.20s area it
hit in 2010, but losses could be slowed by Asian reserve
diversification flows.
China voiced support for European government bonds on
Friday as crucial investment choices for its foreign exchange
reserves. []
The dollar index, which measures its performance against a
basket of major currencies, fell 0.2 percent to 80.854, having
risen to a high of 81.313--its highest since early December.
The dollar slipped 0.4 percent to 82.72 yen <JPY=EBS>.
(Additional reporting by Neal Armstrong in London; Editing by
Leslie Adler)
