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Euro rises after Spanish Budget

Friday, September 28 12:30:57

The euro rose against the dollar today, recovering from a two-week low, after Spain unveiled on Thursday a budget that many saw as laying the groundwork for an application for financial aid.

Analysts said the euro's gains may be limited as long as uncertainty persisted over when and whether Spain will request a bailout. Longer-term, concerns Spain would be unable to implement its budget plans and bring down its deficit could weigh on the single currency.

Some of those worries were reflected in higher Spanish bond yields and a drop in Spain's benchmark IBEX stock index.

Nevertheless, the budget was well received and some said it was an attempt to pre-empt the conditions of a bailout. A bailout request by Spain is a precondition for the European Central Bank to start buying and lower borrowing costs.

Analysts and traders said this would lift the euro, but Spain has appeared reluctant to take that step.

The euro was marginally higher at $1.2920, well above Thursday's two-week low of $1.2828. More gains could see it target last week's peak of $1.31729 although offers from sovereign investors are cited above $1.2870, traders said.

"We do not see the euro moving much higher from here," said Peter Kinsella, currency strategist at Commerzbank.

"Already Spanish yields have gone up and going into the weekend we expect some positions to be squared. The euro should be in a $1.2750-$1.3100 range in the next few weeks."

The euro is up 2.1 percent on the quarter, thanks largely to expectations that Spain's borrowing costs will be brought down when the ECB starts buying Spanish debt.

Trade on Friday was expected to be impacted by month-end rebalancing flows. Citi said they would be negative for the dollar, although Hans Redeker, head of Global FX strategy at Morgan Stanley, reckoned these flows were likely to be too minor to influence trade. (C ) Reuters