* Euro rises 0.2 pct to $1.2680 <EUR=>, recovers early loss
* Euro supported as euro debt fears subside but gains capped
* Some investors concerned about euro's recent slide
(Adds quotes, updates prices)
By Naomi Tajitsu
LONDON, May 12 (Reuters) - The euro edged up on Wednesday,
reversing early losses as euro zone peripheral government bond
yields dropped, partly easing debt concerns and as data showed
the single currency zone grew modestly in the first quarter.
Spain announced public spending cuts to rein in its budget
deficit as part of its drive to meet European Union targets,
after the EU announced a $1 trillion emergency aid package on
Monday to stave off a euro zone debt crisis. []
European central banks were seen buying Portuguese, Irish
and Greek government debt, prodding their yields lower and
narrowing their spreads versus German ones. []
Traders said these factors helped to prompt a squeeze in
short euro positions created during its tumble to a 14-month low
of $1.2510 last week, while analysts said some investors were
growing wary of the speed of the euro's recent depreciation.
"Some in the market are worried that the pace of the euro's
decline may be a concern for the ECB and euro zone central
banks," said Adam Cole, global head of currency strategy at RBC.
"We're not convinced that's the case, but that's what the
market's thinking about this morning."
That view, along with data showing a 0.2 percent quarterly
rise in euro zone GDP, which followed a bigger-than-expected
expansion in Germany and Italy, were helping to boost the euro,
he added. [] [] []
By 1045 GMT, the euro <EUR=> traded at $1.2675, having risen
roughly 0.5 percent on the day to $1.2739 and recovering from
the day's low of $1.2606.
Still, the euro's gains lacked the momentum to push it near
the $1.31 level touched after the debt aid was announced.
Market participants said a short squeeze drove the euro
higher, after short positions hit their highest in the single
European currency's lifetime last week, data from Commodity
Futures Trading showed. []
Traders said stop-loss buys were triggered above $1.2720,
accelerating the gains, with hedge funds buying back euros.
Offers were seen around $1.2740.
Traders also cited talk of a double no-touch option position
in the euro with barriers at $1.25 and $1.31. Such a position
suggests that the holder would buy euros on any drop towards
$1.25 to defend that position until it expires.
Some expect the bounce to be short-lived.
"The data may provide some support, but the bigger picture
for the euro is still negative," said Ian Stannard, senior
currency strategist at BNP Paribas.
EURO ZONE GROWTH MODEST
Against the yen, the euro was up 0.4 percent at 117.75 yen
<EURJPY=R>, after climbing to 118.43 yen in earlier trade.
European Central Bank President Jean-Claude Trichet
reiterated on Wednesday the central bank's stance to sterilise,
or drain excess liquidity from, its government bond buying.
"All liquidity which is being put in through these
interventions will be taken back. We are not running money-
printing presses," he said on French radio.
The dollar rose 0.2 percent at 92.89 yen <JPY=>.
Sterling <GBP=D4> slipped 0.2 percent to $1.4925 after the
Bank of England struck a dovish stance in its quarterly
inflation report, raising speculation that UK interest rates
will stay low for months to come.
The pound relinquished gains made on an earlier relief rally
after UK Conservative Party leader David Cameron became
Britain's new prime minister on Tuesday, having secured a
power-sharing deal between his centre-right party and the
smaller Liberal Democrats to end days of political uncertainty.
(Additional reporting by Tamawa Desai, editing by Stephen
Nisbet)
