* Euro recovers from lows <EUR=>
* Spain's T-bill auction sees good demand, helps euro
* Dollar seen weighed down by accommodative Fed policy
(Adds details, fresh quote)
By Anirban Nag
LONDON, April 26 (Reuters) - The euro hit a 16-month high
against the dollar on Tuesday, helped by demand from sovereign
investors, with expectations that the U.S. Federal Reserve will
keep policy accommodative likely to see it extend its gains.
The euro also got a boost from investor relief at the sale
of close to 2 billion euros of short-term debt by Spain.
That helped it wipe away earlier losses after some used
comments by European Central Bank President Jean-Claude Trichet
on the need for a strong dollar as an excuse to cut long euro
positions. []
Many traders and analysts said the dollar would remain under
pressure from the perception the U.S. central bank is far more
reluctant to tighten policy any time soon than an ECB that has
already begun to raise interest rates.
Following its two-day meeting, the Fed is expected to say on
Wednesday it will stick to its plan to complete a $600 billion
bond-buying programme in June, a factor that has been at the
heart of the dollar's recent fragility. []
"The dollar may be a little volatile going into the Fed
meeting, but the market is not fearing a huge risk of a
surprise. Even though QE2 may come to an end, U.S. policy will
remain accommodative, especially compared with the ECB," said
Jane Foley, currency strategist at Rabobank.
The euro <EUR=> was up 0.2 percent at $1.4607, having hit a
16-month high of $1.4653. It bounced from a session low of
around $1.4494 on steady buying by Middle East investors and
Asian central banks, traders said.
Traders said a sizeable options expiry at $1.4600 on Tuesday
could influence trade, keeping it hovering close to that level.
They added that an options barrier at $1.4700 could also limit
the euro's gains.
"The Spanish auction painted a picture of a market that is
still not concerned about contagion (from the euro zone
periphery's problems) into the Spanish market, and as long as
that is the case the euro should be fairly well protected,"
Rabobank's Foley said.
The euro has gained 9.5 percent this year and the pull-back
earlier in the session was seen as a temporary corrective move.
Data from the U.S. Commodity Futures Trading Commission showed
speculators' long positions in the currency were still near a
three-year high on the Chicago futures exchange. []
The euro zone's problems with sovereign debt are a key risk,
but analysts said with rate differentials still driving markets
the single currency could test the $1.50 mark in the coming
weeks.
"Any rise in the dollar is a good opportunity to sell it
since it should remain weak unless the Fed signals it wants to
tighten monetary policy," said Adam Myers, senior forex
strategist at Credit Agricole.
Spain sold three- and six-month Treasury bills on Tuesday,
drawing solid interest from investors, but the cost of borrowing
jumped by around half a percentage point. [].
Euro zone peripheral debt was pressured across the board
last week due to growing talk that Greece would restructure its
public debt. []
"Investors are right now concentrating on the Spanish
bid-to-cover ratios, but the yields are also rising," said
Geoffrey Yu, currency strategist at UBS. "As the euro eyes the
$1.50 mark, we will tend to be cautious."
FOMC MAY NOT HELP DOLLAR
The dollar was down 0.1 percent against a basket of major
currencies to 73.913 <.DXY>, close to a three-year low of 73.735
hit last week.
The post-meeting news conference by Fed chairman Ben
Bernanke on Wednesday will be the first regularly scheduled
briefing by a Fed chief in the bank's 97-year history.
Traders expect Bernanke will avoid any hint of an immediate
plan to tighten policy and Citi said in a note that those
looking for a Fed-driven interruption in the dollar's downtrend
may be disappointed.
"The Fed is unlikely to directly oppose dollar weakening;
Fed hawkishness cannot be relied upon to support (the) dollar,"
Citi said, added that risks stemming from short dollar
positioning were overstated.
Against the yen the dollar slipped to a four-week low of
81.56 yen <JPY=>, before recovering to trade at 81.71.
Five Japanese life insurers said they may buy more unhedged
foreign bonds, believing the yen may weaken. []
The Australian dollar was up 0.2 percent at $1.0744 <AUD=D4>
very close to its 29-year high of $1.0777 struck on Monday. It
had earlier fallen as commodities edged lower.
(Additional reporting by Jessica Mortimer; Editing by John
Stonestreet)
