FOREX-Euro pares gains, rally on Japan comments fizzles

The euro pared gains made on Tuesday as investors were sceptical a pledge by Japan to buy bonds planned by a European rescue fund would result in fresh buying in the single currency.

Investors initially saw Tokyo's promise to buy the bonds as a show of support for Europe's struggle to tame its debt crisis. The bonds are expected to be issued by the European Financial Stability Facility (EFSF) later this month, and will be used to finance Ireland's bailout plan.

But Finance Minister Yoshihiko Noda's suggestion that Japan would use euro cash holdings to buy the bonds dampened some of the initial excitement from traders who thought the move might involve fresh buying of the European currency. [ID:nL3E7CB076].

As a result, the euro was unable to hold on to initial gains made on the announcement, analysts said.

"The market sees it as a reallocation of existing euros, rather than fresh net buying," said Chris Turner, currency strategist at ING.

"It's encouraging in a way, but the EFSF is well capitalised and the debt is triple A, so there was never really a concern that they would have any problems issuing the debt."

Tokyo's pledge came after China assured Spain it would invest in the indebted euro zone state's bonds -- an assurance whose impact also proved fleeting.

The euro last traded at $1.2940 EUR=, unchanged from late New York levels, having risen as high as $1.2992 after Noda's comments. Resistance is at its 200-day moving average of $1.3072 while support is at $1.2794, the 61.8 percent retracement of a June-to-November rally.