* Euro turns around, up 0.3 percent on the day
* Portugal bond sale helps recovery but yield hits new high
* Euro zone debt worry lingers, overshadow rate hike view
(Recasts, adds quote, details)
By Anirban Nag
LONDON, March 9 (Reuters) - The euro recovered from lows on
Wednesday after Portugal successfully sold bonds, although it is
likely to stay below recent four-month highs as the euro zone's
debt problems outweigh expectations of a rise in interest rates.
Portugal's cost of borrowing two-year debt rose to its
highest since it joined the euro, highlighting the problems
facing peripheral euro zone countries and keeping alive concerns
that it will need an international bailout. []
The common currency was up 0.3 percent at $1.3940,
recovering from a low of $1.3857 <EUR=>, according to Reuters
data. Traders also cited talk that the European Central Bank was
checking Greek and Irish government bond prices as behind the
euro's bounce. Strong German output data also supported the
euro. []
"We saw Portugal successfully raise debt, which has helped
the euro recover," said Tom Levinson, a foreign exchange
strategist at ING. "The sovereign debt crisis is the euro's
Achilles heel for some time now and while we remain bullish on
the euro, it has to close above $1.40 for it to push higher."
The euro had hit a four-month high of $1.4036 in Monday,
buoyed by growing expectations that the ECB will raise rates as
soon as next month. But it ran into profit-taking after hitting
those highs and worries about peripheral debt resurfaced.
"Euro/dollar cannot seem to surpass $1.40 with any vigour,
there is no upside momentum, and it is unlikely to sustain a
break above this level," said Karen Jones, technical analyst at
Commerzbank.
Still, some expect the euro to be propped up by favourable
interest rate differentials, with many expecting the ECB to
retain a hawkish bias despite the peripheral debt problems. That
is in sharp contrast to U.S. monetary policy which looks set to
remain loose for some time to come.
The dollar index fell 0.3 percent to 76.572 <.DXY> as
investors paring short positions in the U.S. unit took a
breather. Data showed a sharp rise in dollar shorts in the week
to March 1. []
EU SUMMIT ON FRIDAY
The market's focus was on a euro zone summit on Friday,
where 17 heads of state are expected to agree on the next
cautious steps in their bid to quell the region's debt crisis,
although they are unlikely to make a major breakthrough.
[]
Concerns about disagreements among euro zone leaders about
how to solve a debt crisis in the region's periphery and worries
a European Central Bank rate hike could hurt indebted euro zone
countries encouraged investors to pare long euro positions.
Friday's summit is only likely to lay the ground for a
meeting of all 27 EU leaders in Brussels on March 24-25, when
they hope to agree on a "comprehensive package" of measures they
hope may draw a line under the crisis.
James Wood-Collins, CEO at Record Currency Management with
$31 billion assets under management, said the possibility of a
default, or a country leaving the euro area are the two major
risk factors the euro at the moment.
"More euro turbulence and volatility lay ahead in coming
months," he added.
One-month euro/dollar implied volatility edged up on
Wednesday, trading around 10.15 percent <EUR1MO=>, from 9.95
percent on Tuesday, suggesting slightly higher expectations of
fluctuations in the currency's value.
The dollar was marginally higher against the yen at 82.70
yen <JPY=>, helped by a generally rising trend in U.S. Treasury
yields. Fund managers have been buyers of dollar/yen in recent
weeks, according to UBS, although the bank said choppy U.S.
yields have limited gains in the currency pair.
(Additional reporting by Niki O'Callaghan and Jessica Mortimer;
Editing by Ruth Pitchford)
