Euro's Break Over $1.50 Won't Last Long. By Nicholas Hastings

The euro may have finally climbed over $1.50 but the move looks distinctly unconvincing.

Instead of soaring ahead on higher equities, hopes for a global recovery and talk of more reserve diversification out of the dollar, the single currency is looking increasingly vulnerable to a nasty correction. It already seems to be faltering and has fallen back under the $1.50 level as of early Tuesday.

Not only are euro bulls worried about verbal intervention as the single currency's strength starts to damage euro-zone recovery prospects, but the dollar's safe haven is becoming attractive again as the gains in global stocks look a little overdone and disappointing gross domestic product numbers from countries such as the U.K. suggest that confidence in the global recovery may be misplaced.

A good test of investor appetite for the dollar will come this week as the U.S. Treasury offers $123 billion of paper. The exercise will provide another opportunity for international investors to show that they still see U.S. assets in a favorable light.

Since July, the dollar has been driven steadily lower against the euro as global equity markets have anticipated the end of the global recession and investors have become less determined to hide in safe havens.

Last week, the move culminated in the euro's rise over $1.50--a level last seen in August 2008.

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A final push came at the start of this week with renewed talk that China should diversify its reserves out of the U.S. currency in to the euro and the yen.

However, the impact of any diversification talk should be brief and limited, given that China is unlikely to risk undermining the value of its current reserves by selling the dollar.

It is the shifting outlook for equity markets and the global recovery that will help reverse the dollar's recent weakness.

Although this week will bring another rash of third-quarter earnings reports, underlying sentiment could well be damaged by the prospect of a new wave of bank writedowns in the commercial real estate sector.

Analysts at BNP Paribas SA noted that the bankruptcy of CAPMARK late last week, with about $20.6 billion of assets under administration, was a harsh reminder of the risks still associated with commercial property.

"This bankruptcy will move market attention to commercial real estate where banks still have to write down assets," the analysts said.

Meanwhile, investor confidence in the global economic recovery has been seriously hurt by Friday's news that the U.K. economy contracted by 0.4% in the third quarter, rather than expanding and marking the end of recession as expected.

This has raised doubts that the U.S. GDP figures due Thursday will fail to hit the forecast 3% annualized growth rate.

Even before the news from the U.K., that strong U.S. growth rate was unlikely to be sustained in the last quarter of the year as various U.S. government stimulus programs come to an end.

Once again, the market will be left worried about the level of U.S. private consumption and the strength of the country's recovery from the downturn.

On the flip side, the euro itself may no longer seem such an attractive proposition if global investors start losing their appetite for risk.

The single currency's steady rise for most of this year is, furthermore, hardly being welcomed by euro zone officials, who will only intensify their efforts to talk the currency down to ensure that it doesn't rally much beyond $1.50 and endanger the feeble recoveries being staged in many parts of the euro zone.

There are already signs that the euro is having difficulty hanging onto gains over $1.50 after a slide in equities gave the U.S. currency a boost late Monday in New York.

Lower stocks continued through Asian trading with the Nikkei falling 1.5% and the Shanghai Composite losing 2.8% after the Dow Jones Industrial Average closed 1.1% lower.

However, as European trading got underway a little correction pushed the dollar back down as the market waits to see if U.S. Treasury auctions attract enough global demand.

By 0815 GMT, the euro was back up at $1.4899 after being quoted late in New York Monday down at $1.4853, according to EBS. The dollar slipped to Y92.03 from Y92.21 while the euro rose to Y137.06 from Y136.96.