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Thu 28 Jul 2011 09:00 AM

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Euro shaken by contagion risks, dollar no safer

US dollar remains on defensive as Washington shows no signs of progress in debt agreement

Euro shaken by contagion risks, dollar no safer
US dollar and euro currency

The euro struggled to find fans in Asia on Thursday, on
renewed fears of contagion in Europe, while the US dollar remained on the
defensive as Washington showed no signs of progress in debt agreement.

The dollar and the euro both sagged against the yen after
Japanese Economics Minister Kaoru Yosano was quoted by Jiji news agency as
saying currency intervention as big as 1 to 2 trillion yen ($13-26bn) would be
quite difficult.

Yosano also said the focus for Japanese policymakers would
be the August 2 deadline to raise the US debt ceiling, Jiji reported, citing
the governor of Aichi Prefecture in central Japan.

The euro dipped 0.1 percent against the dollar to $1.4359
and fell 0.2 percent versus the yen to 111.78 yen.

The dollar eased 0.2 percent to 77.86 yen, hovering near a
four-month low of 77.57 yen hit on Wednesday on trading platform EBS, not far
from a record low of 76.25 yen struck in March.

Traders say a decisive drop below an option barrier at 77.50
yen could accelerate the dollar's drop against the yen, with stop-loss orders
said to be lurking below that level.

Weighing on the euro were contrasting statements by euro
zone leaders which highlighted the fragility of last week's deal to rescue
Greece, as well as Wednesday's rise in Italian government bond yields ahead of
an auction on Thursday.

"If Italian 10-year government bond yields break above
their previous peak and keep rising after climbing above 6 percent, that would
be a cause for significant concern," said Junya Tanase, chief FX
strategist for JPMorgan Chase Bank in Tokyo.

The euro held steady against the Swiss franc at 1.1515,
struggling to regain ground after having fallen 0.9 percent on Wednesday,
bringing it closer to a record low of 1.1365 franc hit in mid-July on trading
platform EBS.

The euro extended its drop against the Australian dollar,
hitting a six-month low of A$1.2993 at one point. Euro/Aussie last stood at A$
1.3010, down 0.1 percent and adding to its roughly 1.7 percent drop on
Wednesday.

The US dollar was seen likely to remain on the defensive
against safe-haven currencies as the prospect of a US downgrade is becoming
real. Washington lawmakers were showing no progress on raising the nation's
debt ceiling ahead of the August 2 deadline.

Analysts said the dollar's outlook remained downbeat. Market
players are worried that the deficit reduction proposals being discussed in
Congress may fall short of the budget cuts necessary to avert a US debt
downgrade by ratings agencies.

The dollar is likely to enjoy a short-covering rally if the
debt ceiling is raised in time to avert a default, but such a bounce could
prove short-lived, said Sacha Tihanyi, senior currency strategist for Scotia
Capital in Hong Kong.

"I believe that a debt ceiling decision will happen,
but it is unlikely that the long term fiscal structure will be changed enough
to completely remove the risk of a downgrade," Tihanyi said.

"The dollar short-covering would only be in the
immediate vicinity of an agreement, after which I'd expect the bearish...
fundamental picture to reestablish itself," Tihanyi added.

The dollar edged up 0.1 percent against the Swiss franc to
0.8023, stuck near a record low of 0.7996 hit on Wednesday on EBS.

The New Zealand dollar edged up to $0.8735 earlier after the
Reserve Bank of New Zealand flagged a rate hike as early as September, nearing
a 30-year peak of $0.8766 hit on Wednesday.

The kiwi later faltered, however, and was last down 0.1
percent on the day at $0.8712.

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