Euro holds ground after Spanish auction

[January 13, 2011]  LONDON (AP) -- The euro hovered close to one-week highs against the dollar while stocks traded in narrow ranges Thursday after a successful Spanish bond auction provided some reassurance about Europe's debt crisis.

Investors waited for more news on efforts to contain the debt contagion from the monthly press conference at the European Central Bank.

The news that Spain managed to easily raise euro3 billion via an auction of five-year bonds further eased tensions following Portugal's own successful bond auction on Wednesday. Italy -- considered less vulnerable than Spain -- also successfully raised the money it was looking for in the bond markets.

"As of today, the markets have breathed a sigh of relief but underlying issues remain unresolved in the absence of a more coherent policy to deal with potential debt restructuring," said Neil MacKinnon, global macro strategist at VTB Capital.

The euro was trading 0.2 percent higher on the day at $1.3156, just down from its earlier one-week high of $1.3170.

In Europe's stock markets, trading was generally uninspired following fairly solid gains this week.

Germany's DAX was down 16.10 points, or 0.2 percent, at 7,052.68 but France's CAC-40 rose 11.56 points, or 0.3 percent, at 6,015.16. The FTSE 100 index of leading British shares was down 35.56 points, or 0.6 percent, at 6,015.16.

Demand for Spain's auction was high -- oversubscribed by 2.1 times -- and the interest rate the government had to pay was higher but not astronomical. Though the yield spiked to 4.542 percent from 3.576 percent the last time the bond with a 2014 maturing was offered, the rate was well within what is considered tolerable levels.

The spike up was expected -- since November's auction, Spain's borrowing costs in the markets have risen as investor fears about Europe's debt crisis spreading ratcheted up after Ireland had to be bailed out.

Analysts said the success of the auction has a lot to do with a more active role taken by the European Central Bank in recent days.

The ECB has reportedly been buying Portuguese bonds in the markets in an attempt to get the yield down. The evidence, at least in the markets, is that it has helped. Portugal's yield on its benchmark 10-year bond has fallen from a euro-era record of 7.18 percent on Monday to a current rate around 6.8 percent.

Buying bonds supports their prices, taking pressure off the banks that hold them. It also lowers bond yields, which indicate the borrowing costs countries would face were they to go to the market for more credit.

ECB president Jean-Claude Trichet will likely be quizzed about the bank's bond-buying program when he holds a press conference following the monthly policy meeting, where the main interest rate is expected to be held at the record low of 1 percent.

Analysts also reckon the pledges of support from Japan and China have provided temporary relief in Portugal's battle to prevent a bailout, but that underlying problems remain to be resolved both at the country level and at the EU level.

Though many analysts believe Portugal will end up having to get a lifeline despite its ability to tap investors for funds Wednesday, as Greece and Ireland have had to, the real concern is stopping the crisis spreading to Spain.

Emergency support for Spain would test the limits of the existing bailout fund, potentially putting the euro project in jeopardy if governments don't put up more cash. The country makes up over 10 percent of the eurozone economy, whereas Greece, Ireland and Portugal only account for around 2 percent each.

There's growing speculation that the eurozone finance ministers, who meet in Brussels early next week, could discuss an increase in Europe's bailout fund as well as making it more proactive in dealing with the crisis.

Ashley Davies, an analyst at Commerzbank, said the key to whether Europe's debt crisis drags on is what reforms Europe agrees to on an institutional level.

"It would seem that this reform might take place earlier than we had expected," said Davies.

The focus isn't just on Europe though -- a batch of U.S. economic data will be closely monitored in the context of how the world's largest economy is performing following mixed reports of late.

Ahead of the open, Dow futures were down 13 points at 11,695 while the broader Standard & Poor's 500 futurs fell 1.6 point to 1,281.80.

Earlier in Asia, stocks generally advanced following gains elsewhere Wednesday in the wake of Portugal's positive bond issue.

Japan's Nikkei 225 stock average closed 0.7 percent higher at 10,589.76, but South Korea's Kospi fell 0.3 percent at 2,089.48 after the central bank unexpectedly hiked its key interest rate for the second time in three months in an effort to tame rising inflation. The Bank of Korea raised its benchmark seven-day repurchase rate to 2.75 percent from 2.5 percent. The announcement came a day after a record high on the Seoul exchange.

Elsewhere, Hong Kong's Hang Seng index rose 0.5 percent to 24,238.98 and Australia's S&P/ASX 200 jumped 1.5 percent to 4,795.20.

Chinese shares rose slightly, with the benchmark Shanghai Composite Index advancing 0.2 percent, or 6.41 points, to 2,827.71 and Shenzhen Composite Index for China's smaller, second exchange up less than 0.1 percent to 1,257.32.

Benchmark oil for February delivery fell 19 cents to $91.67 a barrel in electronic trading on the New York Mercantile Exchange. Crude gained 75 cents to settle at $91.86 on Wednesday, the highest settlement price since October 2008.

[Associated Press; By PAN PYLAS]

AP Business Writer Pamela Sampson in Bangkok contributed to this report.

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