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Mon 19 Dec 2011 12:09 PM

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Dollar holds some gains made on Kim Jong-il death

European single currency under pressure but stays above 11-month low

Dollar holds some gains made on Kim Jong-il death

The dollar held some of the gains it made on Monday as it spiked higher on safe-haven bids following news of the death of North Korean leader Kim Jong-il.

North Korean state television reported the demise of the leader of the reclusive nation, with aspirations to be a nuclear-armed power, which had begun the process of transferring power to his son Kim Jong-un. The older Kim was said to have suffered a heart attack on a train on Saturday.

Against its Japanese counterpart, the dollar bought 77.94 yen, after spiking to a session high of 78.18 yen from around 77.86 yen shortly before the news of Kim's death. The dollar index was at 80.430, after rising as high as 80.493 from 80.303 before the news.

"Risk proxies are selling off, and forex is taking the lead from equities markets," said Sue Trinh, senior currency strategist at Royal Bank of Canada in Hong Kong.

"He died of natural causes on a train rather than from anything that sounds dodgy, but risk currencies are selling off on the political uncertainty. Still, the moves look a bit wrong and overdone, and I would expect a bit of retracement later," she added.

The Australian dollar bought $0.9930, after easing to $0.9902 from $0.9922 shortly before the news. It dropped from $0.9987 in late New York trade on Friday.

The Aussie lost 2 percent last week but did manage to bounce from lows around $0.9862, with support seen around that level with resistance at $1.0052.

"In light of uncertainties about what would follow after his death and what implications it would have on Asia, the initial reaction is to seek a safe haven in the dollar, which is a key global settlement currency," said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

The euro, hurt by fears of European sovereign ratings downgrades, remained under pressure after its worst weekly performance in three months.

"The market was leaning towards dollar buying seasonally, with the year-end and also with the European crisis, and this preference for the dollar will strengthen further," Hattori said.

The single currency stood at $1.3013, down from a high of $1.3049 hit early in the Asian session and approaching an 11-month low of $1.2944 marked last week.

In addition to following any updates on the North Korean leadership, investors will also focus on a euro zone finance ministers teleconference call from 1430 GMT about the draft text of a new fiscal compact agreed earlier this month. Talks will also include the size of individual bilateral loans to the International Monetary Fund.

Short-covering could also underpin the currency. IMM data released on Friday showed net short positions in the euro against the dollar totalled 116,457 as of Dec. 13, following a disappointing EU Summit.

"With such large short positions, it's very possible that the euro could get a brief lift on short-covering in thin conditions ahead of the end of the year, even though pressure remains from the downgrade concerns," said Koji Fukaya, chief currency analyst at Credit Suisse in Tokyo.

Resistance lies at $1.3090, which would be a 50 percent retracement of its recent move from $1.3236 to $1.2944. Another key barrier lies at $1.3125-45.

Any sign of improving credit conditions in the euro zone would also provide support for the single currency.

The European Central Bank is preparing this week to prop up euro zone lenders with three-year low-price loans to revive the struggling interbank lending and funding market.

Banks could take an estimated 250 billion euros ($326 billion) at the first auction of the three-year loans on Wednesday. Some hope the banks will use the funds to buy EU sovereign debt and pull yields down.

But the euro remains highly vulnerable to more EU ratings downgrades as France faces up to a double-notch cut by Standard & Poor's, which put a raft of European nations on review earlier in December.

Investors are already positioning for the worst, traders said.

"As soon as the announcement comes out, there will be a short-term negative impact but it's all baked in the cake for Europe," said David Scutt, a trader at Arab Bank Australia.

Some analysts say the European unit has even more room to fall next year.

Nomura Securities recommends booking profits for now, in the wake of the euro's 3 percent drop last week, solid bond auctions in Italy and Spain and a narrowing in spreads on the bonds of Belgium and France, but it forecasts the euro will fall as low as $1.2000 by the end of the first quarter of 2012.

On Friday, Moody's cut Belgium by two notches to Aa3 from Aa1, citing risks to economic growth and the costs of bailouts of banks such as Dexia.

This came in addition to Fitch's warning it could downgrade France and six other euro zone countries as it believes that a comprehensive solution to the region's debt crisis is "technically and politically beyond reach".

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