SECRET FACTS BEHIND Euro FALLS VS DOLLAR

SECRET FACTS BEHIND Euro FALLS VS DOLLAR

The Euro retreated from a two-week high against the dollar on Friday as investors took profits on a short-covering rally, but cautious hopes Greece may be nearing a deal to avoid a chaotic default may offer support.

The single currency was last down 0.4 percent at $1.2910, falling from a peak of $1.2986 hit in early London trade when it stopped just shy of the key $1.30 level. It remained well above last week's 17-month low of $1.2624.

So far this week the euro has gained more than 2 percent, putting it on track for the biggest weekly rise since October after solid bond auctions in Spain and France on Thursday boosted risk appetite.

Analysts said it was normal to see profit-taking after such a strong rally and the euro was likely to stay supported in the short-term as investors await the outcome of the Greek talks.

Greece and its private bondholders drew closer on Friday to a bond swap deal that would prevent the country from sinking into a chaotic default and ease the euro zone's debilitating debt crisis.

A positive outcome to the talks is expected to boost the euro, although investors would remain wary about the risks of the region's debt crisis deteriorating further. Any negative news could see investors re-establish bearish bets.

"Even though there have been some positive comments on the Greece talks it is clear the market is scared of contagion risks," said Carl Hammer, chief currency strategist at SEB in Stockholm.

"It is too early to tell if we will see more of a euro recovery. The crisis will be producing negative headlines for a long time".

Against the yen, the euro was down 0.4 percent at 99.52 , off an earlier three-week high of 100.33 yen but still comfortably above an 11-year low of 97.04 yen on Jan. 16.

Investors stacked up bets against the euro after ratings agency Standard & Poor's downgraded nine euro zone countries including France and Austria last week.

Since then sentiment has improved, and some market players said the unwinding of short positions may give the euro a further lift in the near-term, pushing it through reported offers around $1.30, although further gains could be difficult.

"This is just profit-taking - we pretty much had a straight-line rally since Monday morning. We could see another 40-odd points on the downside but I think we will hold between $1.2860 to $1.30," said Geoff Kendrick, FX strategist at Nomura.

Aside from the risk of a messy Greek default, market players still see downside risks to the euro in coming months, due to concerns that the euro zone economy may slip into recession and limit progress toward fiscal consolidation in the region.

SLUGGISH CHINA MANUFACTURING

The euro and the risk-sensitive Australian dollar took in their stride a survey showing China's manufacturers started 2012 in a sluggish mode.

The HSBC flash manufacturing purchasing managers index (PMI), the earliest indicator of China's industrial activity, stood at 48.8 in January, below the 50 level that demarcates expansion from contraction.

The reading was the highest in three months, however, and was a slight improvement on the 48.7 final figure for the December index.

The Australian dollar eased 0.1 percent to $1.0417, not far from an 11-week high of $1.0450 hit earlier this week.

The dollar edged higher versus a basket of currencies to 80.342, moving away from a two-week low of 79.99 hit earlier in the session.

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