* Euro hits 1-week high vs USD, above tenkan line
* Euro rebound may lose steam if no concrete steps from G7
* Some speculate ECB might act on Wed
* Aussie gains after 25 bp cut, market expects more cuts
* Short-term dlr/yen call options in favour on intervention fears
TOKYO, June 5 (Reuters) - The euro extended gains to a one-week high on Tuesday as some sellers pared back their huge bets against the currency ahead of a conference call by the Group of Seven financial policy makers on the European debt crisis.
Although market players remain sceptical of a major breakthrough given a lack of consensus within Europe on how to save Spanish banks and on other matters, there was caution in case the meeting leads to some kind of policy agreement, given record short positions on the euro.
"It will take a long time to resolve the debt crisis. I don't expect European policy makers to come to an agreement soon. I am ready to sell the euro around $1.2550," said a trader at a Japanese bank.
The euro rose to as high as $1.25429, its highest in a week, extending its rebound from a two-year low of $1.2288 reached on Friday. It last stood at $1.2520, up 0.2 percent from late U.S. levels.
On the daily Ichimoku chart, the euro rose substantially above the tenkan line for the first time in about a month and if it closes above that level, at $1.24565 on Tuesday, it could herald further recovery in the battered currency.
Immediate resistance for the euro lies at $1.2545, the 76.4 percent Fibonacci retracement of its decline last week and above that there is resistance at $1.2570, the 23.6 percent retracement of its longer term decline from a February high of $1.34869.
Against the yen, the single currency rose 0.3 percent to 98.22 yen, moving off Friday's 11-year low of 95.59 yen. It hit a fresh one-month high against the British pound at 81.405 pence.
News that finance chiefs from the Group of Seven leading industrialised powers will hold emergency talks on the euro zone prompted some market players to speculate that the European Central Bank could yield to additional pressure.
"They may put pressure on the ECB to do something," said Eiji Kinouchi, chief technical analyst at Daiwa Securities.
Some market players said ECB President Mario Draghi may embark on pre-emptive moves and surprise markets, as he did last year just after he took over the helm at the bank. They added that the ECB could implement a rate cut or a massive injection of funds.
RBA CUTS
Financial markets are anxious about the risks from a Spanish banking crisis and fret a Greek election on June 17 could lead Athens to leave the single currency and precipitate yet more economic turbulence.
France and the European Commission signaled their support on Monday for an ambitious plan to directly use the euro zone's permanent bailout fund to rescue stricken banks.
But Germany, the euro zone's biggest economy and the biggest contributor to the European Stability Mechanism, has so far opposed any use of bailout funds without a country having to submit to a politically humiliating austerity programme imposed by international lenders.
In a sign of increasing concern about the impact of the euro zone debt crisis, the Reserve Bank of Australia cut interest rates by 25 basis points but the cut was less than some had expected, sending the Australian dollar higher .
Local money markets had been pricing in a rate cut of at least 25 basis points, with some players looking to a deeper 50 basis point cut.
The Australian dollar rose close to 0.7 percent to $0.9784 , extending its recovery from an eight-month trough of $0.9581 hit on Friday.
Still, some market players see the Aussie trapped in a downtrend as they expect the Australian central bank to cut rates further in coming months.
The Japanese yen moved little against the U.S. dollar at 78.33 yen, off Friday's 3 1/2-month low of 77.652 yen, helped by wariness about Japanese yen-selling intervention as Japanese Finance Minister Jun Azumi has stepped up his rhetoric against the yen's rise.
Some market players are buying short-term dollar/yen calls to bet on, or hedge against intervention, pushing the one-week risk reversal spread to its highest level in favour of dollar calls in six months. (Additional reporting by Antoni Slodkowski; Editing by Edwina Gibbs)
UAE finance minister lowers 2012 GDP forecast - AME Info
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Debt crisis: Live - Daily Telegraph
GERMAN BANKING SYSTEM ROBUST BUT CANNOT COMPLETELY AVOID EFFECTS OF FINANCIAL ENVIRONMENT
BAFIN, BUNDESBANK CLOSELY FOLLOWING DEVELOPMENTS IN SPAIN, PORTUGAL; SITUATION THERE NOT COMPARABLE TO GREECE
Euro slides after Spanish Tresury Minister warns the country's high borrowing cost mean it is effectively shut out of the bond market.
09.30 The euro has dipped to a session slow of $1.2424 after the Spanish Treasury minister's comments.
09.10. Cristobal Montoro, the Spanish Tresury minister, has warned that Spain's high borrowing costs mean it is effectively shut out of the bond market. The country will test the market on Thursday and issue up to €2bn in medium- and long-term bonds at auction.
He said in an radio interview:
The risk premium says Spain doesn't have the market door open. The risk premium says that as a state we have a problem in accessing markets, when we need to refinance our debt.
The yield on benchmark 10-year Spanish government bonds was 6.3pc on Tuesday - down from 6.7pc last week but still too high. The risk premium investors demand to hold Spanish 10-year debt rather than rather than German equivalents hit a euro era high of 548 basis points on Friday.
Cristobal Montoro, Spain's Tresury minister, said the country was effectively shut out of the bond market. Photo: Reuters
09.00 May this explains why Spanish shares are rising. Bloomberg's Linda Yueh tweets:
Bloomberg reports that Spanish Treasury Minister Cristobal Montoro said European “institutions” should help shore up the nation’s lenders in a interview with Spanish broadcaster Onda Cero in Madrid today.
His view - similar to Santander's Botin (see entry at 8.40) - is the Spanish banks don’t need “astronomical figures” to recapitalize so European institutions should "open up and help us".
Does he have a point? After all, hundreds of billions have been swallowed up by Greece to no avail, so why fuss about a few billions to prop up one of the eurozone's larger economies?
08.55 Still with Spain. The contraction in the country's dominant services sector accelerated in May for the eleventh month. The Purchasing Managers Index for services was 41.8 in June, down from 42.1 the previous month - 50 is the dividing line between growth and contraction.
Andrew Harker, economist at data provider Markit, said:
The really worrying aspect about the Spanish PMI numbers at present is that after more than four years of crisis, conditions for businesses appear to be worsening at increasing rates with no sign of recovery on the horizon.
Investors don't seem too bothered. The Ibex index rose for a second day, gaining 0.8pc after a 2.9pc jump on Monday.
08.40 Worries over Spanish banks are high. One G7 source, speaking on condition of anonymity, told Reuters:
There is concern on whether there will be a bank run in Spain that could have repercussions beyond the eurozone.
Emilo Botin, chairman of the nation's biggest Santander, doesn't think so. He said on trip to Brasilia that "there is no financial crisis in Spain" - there are just a few banks in need of financial support - €40bn if he is to be believed.
That said, the captial flight from Spain rose to €100bn in the the first three months of the year. So, while Mr Botin is not worried, many of his compatriots are.
Jay Carney, White House press secretary, says US wants more decisive action from the EU
08.20 The US was also piling the pressure on eurozone leaders to act. White House press secretary Jay Carney said:
Markets remain sceptical that the measures taken thus far are sufficient to secure the recovery in Europe and remove the risk that the crisis will deepen.
Despite the calls, Europe remains divided over how to end the debt crisis. Olli Rehn, the EU economics chief, yesterday said use of the European Stability Mechanism to bail out lenders was a "serious possibility" - this would relieve pressure on Spanish banks weighed down by bad loans from the property boom.
But Germany is not convinced. Fresh talk of the use of eurobonds to provide liquidity to banks, met this reponse from the eurozone's paymaster:
The German people are not willing to send money into a bottomless pit.
08.05 Japanese Finance Minister Jun Azumi said of the G7 talks:
We have reached a point where we need to have a common understanding about the problems we are facing.
He urged more action from the eurozone. Yesterday, Canadian Finance Minister Jim Flaherty said finance ministers and central bankers of the United States, Canada, Japan, Britain, Germany, France and Italy would hold a special conference call to discuss the crisis.
In Paris, the CAC 40 gained 0.60pc to 2,972.31 points. Frankfurt's DAX 30 rose 0.36pc to 5,999.86 points. London remains closed for the Queen's Diamond Jubilee holiday. The euro extended gains to a one-week high.
Earlier, stocks in Tokyo closed higher, after a heavy sell-off on Monday, as investors looked to the talks aimed at tackling Europe's fiscal woes. The Nikkei 225 gained 1pc to close at 8,382.00, a day after it plunged to a six-month low of 8,295.63. The broader Topix index rose 1.83pc, or 12.73 points, to 708.24. The index tumbled to its lowest level since December 1983 on Monday.
Shares in Hong Kong, South Korea and Australia rose 0.7pc, 1pc and 1.5pc respectively.
The Reserve Bank of Australia reduced interest rates amid signs of a slowing global economy
07.30 Australia's central bank cut interest rates by 25 basis points to 3.5pc on Tuesday, amid continued fears over weakness in Europe and easing growth in China. This is on top of a 50 basis point reduction last month and takes them to a level not seen since November 2009.
Reserve Bank governor Glenn Stevens said.
With modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy.
He said that while growth in the world economy picked up in early 2012, more recent indicators suggested further weakening in Europe and some further easing in growth in China. Mr Stevens said:
Financial market sentiment has deteriorated over the past month.
07.15 A great graph from the Wall Street Journal showing how the Dow in 2012 echoes the market's rise and fall in 2010 and 2011 over the same period:
07.12 Last night credit ratings agency Egan-Jones (not one of the big three) cut the UK's sovereign credit rating to AA- from AA. In a statement, Egan-Jones said:
The over-riding concern is whether the country will be able to continue to cut its deficit in the face of weaker economic conditions and a possible deterioration in the country's financial sector. Unfortunately, we expect that the UK's debt/GDP [ratio] will continue to rise and the country will remain pressed.
07.10 Derek Scott, a former economics adviser to Tony Blair, feels there is no solution to the EMU problem that does not make matters worse for Germany.
Given the magnitude of the problem 'internal devaluation' cannot work but putting it right requires an adjustment in relative prices – between surplus and deficit countries. One "solution" is that Germany should accept higher inflation and boost domestic demand but the scale of lost competitiveness would require inflation rates that would be intolerable in Germany for this solution to 'work'.
What is required is an ex-ante adjustment in relative prices via nominal exchange rate adjustment not ex-post adjustment via relative inflation.
The other 'solution' is greater fiscal union. But this could only 'work' by evolving into an arrangement under which annual transfers – 'gifts' not loans – of €150bn to €200bn were paid in perpetuity from current account surplus countries to deficit countries to obviate the need of the latter to make the necessary adjustments through their trade accounts. That would wreck Germany's economy and its public finances.
EMU is the problem, and within its existing configuration there is no solution that does not make matters worse for peripheral countries and Germany.
07.02 Over in the US, Goldman Sachs believes a bear market in America could take hold if the eurozone debt crisis worsens. Angela Monaghan writes:
Mr Kostin said there were three key events in the short-term that could heighten investor uncertainty: the Greek election on June 17; the June meeting of the Federal Open Market Committee; and the US Supreme Court’s ruling on healthcare reform.
He gave a central mid-year forecast for the S&P 500 of 1,325, should there be no intensification of the eurozone crisis.
06.55 There is "at least" a one-in-three chance that Greece will leave the eurozone, credit rating agency Standard and Poor's has warned.
This could be brought about by Greece rejecting the reforms demanded by the troika - the European Commission, International Monetary Fund and European Central Bank - and a consequent suspension of external financial support.
"Such an outcome would, in our view, seriously damage Greece's economy and fiscal position in the medium term and most likely lead to another Greek sovereign default.
"We believe that the hardships the Greek population would suffer were Greece to exit would dissuade any other member state from following suit.
06.53 Ambrose Evans-Pritchard has reported that growth of the world money supply has dropped to the lowest level since the financial crisis of 2008-2009, heralding a severe economic slowdown later this year unless authorites rapidly take action.
The world money data collected by Simon Ward at Henderson Global Investors show that real M1 for the G7 economies and leading E7 emerging powers peaked at 5.1pc in November and has since plunged to 1.6pc in April. The data explain why commodity prices are falling hard, with Brent crude down to a 16-month low of under $97 a barrel.
06.50 UK markets closed again today because of a bank holiday, but European and US indices will be trading.
06.45 Good morning and welcome back to our live coverage of the European debt crisis.
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