Euro off lows; lot rides on EU events
SYDNEY (Reuters) - The euro recovered from a dip to one-week lows in Asia on Wednesday, with markets cautiously optimistic that recent credit warnings by Standard & Poor's would spur European leaders into more decisive action at this week's summit.
The common currency stood at $1.3402, having fallen as far as $1.3332 overnight. The bounce back through Friday's trough of $1.3365 means its corrective rise from $1.3210 two weeks ago remains intact, traders said.
"We see scope for some additional short covering between now and the weekend, barring an EU summit failure. One caveat being if the ECB surprises with more aggressive easing on Thursday than the 25-basis-point reduction in the refinancing rate that is generally expected," analysts at BNP Paribas said.
Having threatened to cut the credit ratings of euro zone countries en masse, S&P then placed the region's financial rescue fund on review for a possible ratings downgrade.
But a S&P director offered some hope that a mass downgrade could be avoided, telling Reuters Insider a plan by France and Germany to increase fiscal integration in Europe is "promising".
Also helping sentiment was comments from a top Bank of Italy official, who said the European Central Bank would do what is needed to help fight a deepening economic slowdown and Europe's debt crisis.
Apart from a rate cut, analysts expect the ECB to provide extra liquidity measures for the banking system as well after Thursday's policy meeting.
The rebound in the euro saw the dollar index .DXY edge down 0.06 percent to 78.523. Against the yen, the dollar was little changed at 77.71 yen, with no real trend in sight.
Commodity currencies also recovered from Monday's lows, with the Australian dollar back above $1.0200, off the overnight trough of $1.0156.
But traders expect no big moves from the Aussie ahead of third quarter gross domestic data due at 0030 GMT. Forecasts centre on moderate growth of around 0.8 percent for the quarter, after 1.2 percent in the second quarter.
The figures are rather dated given the Reserve Bank of Australia has already cut its cash rate by 50 basis points to 4.25 percent this quarter.
"We still believe the RBA will deliver one more cut in the March quarter of next year, but European developments will be the overwhelming guide as to how much easing the RBA ultimately delivers," said Jo Heffernan, senior economist at St George.
"The deeper the crisis and the longer it takes to arrive at an effective solution for Europe, the greater the downside risks to the global economic and financial system and the more likely the RBA might need to tap on the accelerator further."
The Swiss franc stayed on the defensive after a fall in consumer prices to two-year lows boosted speculation the Swiss central bank will weaken the currency further to shield the economy from the risk of deflation and recession.
The dollar fetched 0.9253 francs, having risen as high as 0.9294 overnight. It was near the eight-month peak of 0.9330 set on November 25. The euro climbed to 1.2400 francs, not far off a three-week high of 1.2429 reached overnight.
(Editing by Wayne Cole)
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