* Euro zone set to discuss rescue fund capacity-source
* Debt auctions in Portugal, Italy, Spain in focus
* Euro weakness to resume, seen sliding toward $1.2590
(Updates prices, adds comment)
By Wanfeng Zhou
NEW YORK, Jan 11 (Reuters) - The euro rose on Tuesday on
speculation euro zone officials could raise the effective
lending capacity of the bloc's rescue fund and talk of
increased Portuguese bond buying by the European Central Bank.
The euro climbed near $1.30 in midday trading. Analysts
cautioned it could easily resume its downward trend given
nervousness over a heavy schedule of debt issuance by southern
European countries this week.
A critical test for the euro will come on Wednesday when
Portugal is scheduled to sell up to 1.25 billion euros of bonds
in an auction that will signal whether the indebted country
will be able to afford to raise funds in the debt market or be
forced to take a bailout.
"Given that there are a lot of issues still unsettled with
the European debt crisis, which is likely to continue for many
months, there's always going to be pressure on the euro," said
Ihab Salib, senior portfolio manager and head of international
fixed-income at Federated Investors in Pittsburgh.
Federated Investors manages about $341.3 billion in assets.
Salib oversees more than $3 billion.
The euro last traded up 0.2 percent at $1.2968 <EUR=>,
having risen as high as $1.2994 on trading platform EBS.
Resistance is at its 200-day moving average of $1.3072
while support is around $1.2794, the 61.8 Fibonacci percent
retracement of a June-to-November rally.
Traders expect the euro to retest its four-month low around
$1.2875 set on Monday, with a break likely opening the door to
a drop towards $1.2645 and $1.2590 in the coming weeks.
Euro zone finance ministers may next week consider the
option of raising the effective lending capacity of the zone's
rescue fund, euro zone sources said. See []
The euro earlier also found support after Japan said it
will purchase euro zone bonds to bolster confidence in the
European Financial Stability Facility (EFSF), but momentum
faded after Tokyo said it would use existing euro reserves to
pay for the debt. For more, see []
Tokyo's pledge came after China assured Spain it would
invest in the indebted euro zone state's bonds -- an assurance
whose impact also proved fleeting.
"The support (from Japan) looks set to come from existing
euro reserves, so it will not form an increase in the
allocation of the euro," said Mary Nicola, currency strategist
at BNP Paribas in New York. "In fact, if it's a reallocation
away from the peripheral bond markets to the EFSF bonds, then
it could prove to be euro negative."
AUCTIONS IN FOCUS
Portugal's prime minister and finance minister said on
Tuesday Portugal has no plans to seek a bailout, and the
government was doing everything possible to avoid doing so.
[]
Italy and Spain are due to tap the bond market on Thursday,
in auctions that will also be closely watched for any sign of
contagion. []
Analysts said the euro could see a relief rally once the
three bond auctions were out of the way, though if borrowing
costs stayed high any gains would be temporary.
The dollar rose 0.7 percent to 83.34 yen <JPY=> as recent
optimism about the U.S. economy helped lift bond yields.
"There are lot of headwinds, but having said that, I think
the momentum that the U.S. economy has built over the last four
to six quarters is not something to ignore, Salib said. "I
think that momentum will continue."
He added that a faster economic recovery in the United
States than in Europe could lead to a widening of growth and
interest-rate differentials, further weighing on the euro.
"That I think is not fully priced yet. The euro is still
now acting on the European debt crisis and the volatility
related to that," he said.
The Swiss franc extended prior day's sell-off amid growing
concern about the impact of the record-strong franc on the
local economy. The dollar hit a one-month high of 0.9784 Swiss
franc <CHF=EBS>.
The Australian dollar <AUD=D4> shed more than 1 percent to
a one-month low of $0.9820, on speculation that more flooding
in the country may dent its economic growth.
(Editing by Andrew Hay)
