* European debt crisis threatens to move off backburner
* Dollar off 4-mth lows, short squeeze eyed
* Yen takes Japan-related M&A news in stride
By Ian Chua
SYDNEY, March 8 (Reuters) - The euro edged higher on Tuesday
but crowded bets on the currency could cause a near-term decline
before it is able to take another shot at its November peak just
above $1.4280.
One gauge of market positioning shows that currency
speculators have ramped up their long positions in the euro to a
three-year high, suggesting the single currency may come under
pressure if profit-taking sets in.
Analysts said the near-term outlook for the common currency,
which has gained some 4 percent against the dollar since
mid-February, also hinges on a summit of European Union leaders
on Friday as euro zone countries work on measures they hope will
resolve the region's debt crisis.
While investors have recently been more preoccupied with the
prospect of an interest rate hike by the European Central Bank
as early as next month, the debt crisis threatens to return to
the fore.
"Our iFlow bond indicators confirm global fixed income
managers have once again become net sellers of especially Greek
and also Italian, Irish, Spanish and Portuguese exposure," said
BNY Mellon analyst Samarjit Shankar.
The euro rose 0.1 percent to $1.3981 , having
retreated from a four-month high around $1.4036 on Monday.
Moody's on Monday slashed Greece's sovereign debt ratings by
three notches and left the door open for more downgrades,
worried that the country's efforts to cut debt will not be
enough. This has added pressure on the EU to thrash out a
comprehensive package to deal with the euro zone debt crisis
The euro could consolidate for some time below Monday's high
before making another move higher. In the medium-term, the euro
has support in the $1.3840 to $1.3860 area, where a few intraday
highs hit in late February are clustered as well as the euro's
early February peak of $1.3862.
While a clear breach of that support area would point to the
possibility of the euro heading back down towards $1.3700, a
consolidation above that level could pave the way for the euro
to test its early November peak of $1.4283.
Unrest in the Middle East and higher oil prices also bear
watching, said a trader for a major Japanese bank in Singapore.
"If the situation in the Middle East does not settle down
and prices of commodities stay high, and at the same differences
in monetary policies become even more stark, then the euro will
probably head higher against the dollar," said the trader for a
major Japanese bank.
A surge in crude oil prices in the past couple of weeks on
concerns that the supply of oil could be disrupted by turmoil in
the Middle East and North Africa have fanned worries about the
impact on U.S. consumer spending and helped weigh on the dollar.
SHORT DOLLAR POSITIONS
The dollar index dipped 0.1 percent to 76.458 , having
gotten a bit of reprieve after hitting a four-month low of
76.124 on Monday.
One factor that may support the dollar and weigh on the euro
in the near-term is market positioning.
"We are still USD bears, but the scale of the speculative
market net shorts in the USD is significant," said Peter Frank,
strategist at Societe Generale.
Latest data from the U.S. Commodity Futures Trading
Commission shows that currency speculators boosted their bets in
favour of the euro to the highest since January 2008 in the week
to March 1, while bets against the dollar jumped across the
board.
The dollar edged up 0.1 percent against the yen to 82.28 yen
, roughly in the middle of the prevailing range seen over
the past week of roughly between 81.60 yen and 83.00 yen.
The yen took in its stride news this week about cross-border
corporate investment involving Japanese firms.
Western Digital Corp , the world's No. 2 hard drive
maker, has agreed to buy Hitachi Ltd's hard disk drive
operations for about $4.3 billion in cash and stock.
In the other direction, Terumo Corp has said it
would buy U.S. medical device company CaridianBCT from a Swedish
firm for about $2.6 billion, marking the largest acquisition by
a Japanese medical equipment maker.
The trader for a major Japanese bank in Singapore said it is
hard to tell just how much foreign exchange flows, if any, will
be generated by such cross-border investment.
In the case of Japanese firms investing abroad, they could
theoretically use foreign currency deposits accumulated through
their overseas earnings for such investment, the trader said.
Or they could borrow foreign currency denominated loans,
which would be another option that would not involve foreign
exchange, the trader added.
(Additional reporting by Reuters FX analyst Krishna Kumar in
Sydney and Masayuki Kitano in Singapore; Editing by Kim Coghill
& Ramya Venugopal)
