FOREX-Euro spooked as German auction rings alarm bells - Reuters UK

Thu Nov 24, 2011 6:41am GMT

* Euro up on short-covering but seen struggling

* Poor German bond auction heightens contagion fears

* Belgian bond yield spread over German bonds hits euro high

* Dollar down vs yen as Japan exporters come back after holiday

* Commodity currencies rebound but outlook uncertain

By Hideyuki Sano

TOKYO, Nov 24 (Reuters) - The euro stayed near seven-week lows against the dollar on Thursday, having suffered a steep fall after a "disastrous" German bond sale fuelled fears the region's debt crisis was beginning to threaten even Europe's biggest economy.

Although the euro bounced back slightly in Asia on short-covering, bringing other risk currencies higher with it, market players see the currency staying under pressure as tensions in the currency bloc showed no sign of abating.

"If Germany has to pay higher costs for its borrowing, it's obvious it cannot help the entire euro zone. If German bond yields keep rising, that could even be a trigger for break-up of the euro," said Makoto Noji, a senior strategist at SMBC Nikko Securities.

The common currency traded at $1.3361, after falling over 1 percent on Wednesday to $1.3320. It was on track to reverse all of October's $1.3144-$1.4247 rally, having now retraced more than 78.6 percent of that move.

Against the yen it hit a six-week low of 102.90 yen , opening the way for a test of the decade low 100.77 yen hit in early October.

Germany's bond sale on Wednesday was its least successful since the launch of the single currency.

While unattractively low yields played a big part, some market players fret that Germany may be losing its cherished safe-haven status on the spectre of the rising cost of bailouts as more euro-zone countries come under attack from the market.

Belgian bond yields' spread over German bonds soared to a new euro lifetime high also as the country -- without a formal government since elections last June -- struggles to agree on a deficit slashing budget for next year.

"Belgium has been torn by the division between the (Flemish speaking) north and the (French-speaking) south and is politically paralysed. It just looks like a microcosm of the entire euro zone," Noji said.

Investors were already unnerved by reports that Belgium is leaning on France to pay more into emergency support for failed lender Dexia under a 90 billion euro ($120 billion) rescue deal that had appeared to have been agreed.

"Obviously the market cannot be risk-off 100 percent of the time, but when you look at Europe the situation there just looks to be getting worse," said Junya Tanase, chief currency strategist at JPMorgan Chase in Tokyo.

German daily Bild reported that German backing for the issuance of joint euro-zone bonds is no longer being categorically ruled out in Chancellor Angela Merkel's coalition but traders took little notice amid the view that such a step would take years.

Concerns about how to find a way out of the mess in the euro zone helped to lift the dollar index above 79.000 for the first time since early October. By late afternoon in Tokyo it was at 78.87.

For now, the market is looking to a meeting of leaders of Germany, France and Italy on Thursday, although few market players expect progress in steps to deal with the crisis.

The euro could fall again if Germany's Ifo business sentiment figures due at 0900 GMT show a sharper deterioration than expected and cement worries that the euro-zone could slip into recession.

The dollar slipped about 0.3 percent against the yen to 77.05 yen, with its rise to a near two-week high on Wednesday, when Tokyo was on holiday, luring Japanese exporters to sell.

Still, it has managed to stay above the cloud on the daily Ichimoku chart, with a cloud top around 76.85 seen as support.

Commodity currencies, unsettled by weak Chinese factory data, recouped some of the steep losses made on Wednesday but lacked momentum.

The Australian dollar slid to a seven-week low of $0.9664 on Wednesday before recovering to $0.9740 in Asia on Thursday.

"The underperformance in commodity currencies highlights the dominating concerns over global growth," BNP Paribas analysts said in a note. (Additional reporting by Ian Chua in Sydney; Editing by Joseph Radford and Michael Watson)