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Tue 23 Aug 2011 09:37 AM

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Euro firmer; dollar holds steady against yen

Market to focus now on PMI data for Germany, France and the euro zone

Euro firmer; dollar holds steady against yen
EURO ZONE: The markets focus now turns to flash PMI data for Germany, France and the euro zone due later in the day (Getty Images)

The euro edged higher on Tuesday but could come under
pressure if euro zone manufacturing data point to more downside risk in a
market already fretting about a global recession.

The Australian dollar rose around 30 pips or so after a
gauge of Chinese manufacturing was not as weak as some had feared, and was last
up 0.3 percent on the day at $1.0429 .

HSBC's China flash Purchasing Managers' Index showed the
Chinese factory sector may have slowed slightly in August for a second straight
month. The reading, however, still edged up to 49.8 in August, better than
July's final reading of 49.3.

The market's focus now turns to flash PMI data for Germany,
France and the euro zone due later in the day for clues on whether the region's
deepening debt crisis is weighing on broader economic growth.

"The current stabilisation in risk is conditional on
European PMIs not disappointing sharply. Weaker growth in Germany would lead
the market to think that help for peripheral Europe will be harder to come
back," warned Sebastien Galy, analyst at Societe Generale.

The euro rose 0.1 percent to $1.4378 , with support in the
$1.4340-45 area, where traders said there are some buy orders lurking.

Lower down, there is talk of good bids at $1.4260 to
$1.4270, right around support at last Friday's intraday low near $1.4259, while
selling interest starts from $1.4420 with more selling interest at $1.4450.

Not helping the common currency is the ongoing public
squabbling between the bloc's 17 member states on how to tackle the region's
debt problems.

Germany's Angela Merkel is facing growing domestic criticism
of her euro zone policies, with the Bundesbank slamming an anti-crisis package
she agreed to in Brussels last month and a senior ally warning he would vote
against key parts of it.

The dollar held steady against the yen at 76.79 yen .

Market players are wary of any yen-selling intervention by
Japanese authorities, in the wake of the dollar's drop to a record low around
75.94 yen late last week.

Since dollar/yen bounced around 3 yen from intraday lows the
last time Japan conducted yen-selling intervention on Aug. 4, market players
reckon that the dollar may get a similar lift if Japanese authorities were to
step in again.

Any dollar bounce in the event of intervention is likely to
be met by strong dollar selling interest at levels around 79 yen to 80 yen,
market players say.

"We think it's going to be very, very difficult for the
MOF to get a real successful intervention. There's just a wall of offers,"
said Rob Ryan, FX strategist at BNP Paribas in Singapore, referring to Japan's
Ministry of Finance, which is in charge of currency intervention.

Although intervention may spur dollar short-covering by
trend-following commodity trading advisors, Japanese exporters and retail
investors are likely to sell into any dollar bounce, Ryan said, adding that
some hedge funds have already positioned themselves for possible intervention.

"We've seen some of the macro players turn around and
go long dollar/yen, or take off their shorts because they're effectively
waiting for the MOF to come in and to give them better levels to go short
again," he said.

"It means first of all, the MOF is not going to get the
big short-covering from these accounts if they do intervene, and secondly
they're going to run into offers pretty quickly," Ryan said.

Bank of Japan money market data suggests Japan sold roughly
4.5 trillion yen in currency intervention on August 4, its biggest one-day
yen-selling intervention ever.

But the yen ended up rising back to levels seen before the
intervention a few days later.

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