* Relief impact of emergency aid package proves temporary
* Focus shifts back to debt problems in euro zone
* Sterling rebounds from early losses
(Updates prices, adds comment, changes byline)
By Steven C. Johnson
NEW YORK, May 11 (Reuters) - The euro fell on Tuesday as
concerns about the euro zone's ability to contain a debt crisis
blunted initial enthusiasm after this week's $1 trillion rescue
package.
The euro retreated from Monday's high near $1.31, at one
point falling below $1.27 as investors wondered whether weaker
euro zone economies can deliver the drastic spending cuts and
tax increases needed to get their fiscal houses in order.
"Markets aren't buying the story. It's clear that the
markets remain very concerned about the fiscal outlook for
Europe," said Mike Moran, senior currency strategist at
Standard Chartered Bank in New York. "Clearly, the near-term
outlook is one of skepticism for the euro."
The euro traded at $1.2732 <EUR=>, off a session low of
$1.2667 but still down 0.4 percent on the day. Last week, the
euro fell to a 14-month low around $1.2510, and Moran still
expects it to hit $1.15 by the third quarter.
Against sterling, the euro fell 1.2 percent to 85.05 pence
<EURGBP=D4>. Britain's currency also rose 0.9 percent to
$1.4975 <GBP=D4> as speculation grew the Conservatives were
close to forming a new government with the smaller Liberal
Democrats, with Labour left in opposition. See []
The dollar rose 0.3 percent to 92.99 yen <JPY=>. Traders
said the yen was helped by Japanese exporter buying. The euro
fell 0.7 percent to 118.45 yen <EURJPY=R>.
The euro pared losses against the Swiss franc after the
Swiss National Bank chairman said he was committed to fighting
deflation by preventing excessive franc strength. The euro was
still down 0.5 percent on the day at 1.4115 francs <EURCHF=>.
NOT ENOUGH
Europe's debt trouble showed signs of spreading in recent
weeks as investors drove up borrowing costs for countries such
as Portugal, Spain and Ireland that also face sluggish growth
and high deficits.
Many worry the rescue plan, which would disburse emergency
aid to countries in financial trouble, won't be enough. Nout
Wellink, a member of the European Central Bank's governing
council, told Dutch newspaper NRC Handelsblad the plan is a
safety net and won't work unless countries cut debt levels.
[]
The aid package "is just another way of delaying perhaps
the inevitable," said Shaun Osborne, chief FX strategist at TD
Securities in Toronto. "It pushes the debt problems further
down the road."
On Monday, Moody's Investors Service said it may still
downgrade its credit rating on Portugal. It said Greece's
rating could fall to junk grade. See []
Analysts said the European Central Bank's decision to buy
government bonds could hurt the euro later this year as it
further dampens chances of interest rate hikes in the euro
zone. Most economists at major U.S. banks expect the Federal
Reserve to lift U.S. interest rates in 2011. [].
The options market was showing a clear bias toward further
euro losses. The one-month risk-reversal <EUR1MRR=ICAP> was
trading at 3.00 for euro puts versus 2.65 on Monday, moving
beyond the previous record seen at the peak of the crisis
surrounding Lehman Brothers' 2008 collapse.
But Axel Merk, portfolio manager for the $500 million Merk
Hard Currency Fund in Palo Alto, California, said he remains
bullish on the euro.
"The euro zone is finally getting its act together. It is
moving toward a more solid fiscal management and there is a
sense that problems are being addressed," he said.
"At the end of the day, investors will recognize that the
ones in trouble are the fringe countries and not the entire
euro zone. The euro zone will come out stronger in the long
run."
(Reporting by Steven C. Johnson and Wanfeng Zhou;
Additional reporting by Gertrude Chavez-Dreyfuss; Editing by )
