FOREX-Dollar gains before Fed minutes, euro stays weak
* Euro weak, prospect of quick German court ESM ruling dim * Dollar recovers in positioning ahead of FOMC minutes * Euro at record low vs Aussie dlr, 3-1/2-year low vs pound NEW YORK, July 11 (Reuters) - The dollar gained on Wednesday, sending the euro to a fresh two-year low ahead of the release of minutes from the U.S. Federal Reserve's June meeting in thin liquidity as investors adjusted positions. The dollar had been weak for most of the global session with investors cautious there may be hints of another round of asset buying in the coming months to stoke growth in the U.S. economy. But with hours to go until the Fed release, the dollar recovered. The euro fell against most major currencies on unease over how policymakers will tackle the debt crisis after it appeared there would be no quick judgment from a German court on the euro zone's bailout fund. As well as the two-year low against the dollar, it dropped to a three-and-a-half-year low against the UK pound and a record low versus the higher-yielding Australian dollar. Alongside doubts fed by the debt crisis, the euro zone common currency remained under pressure after the European Central Bank's decision to cut interest rates last week, bringing the deposit rate to zero. The FOMC minutes "will be eagerly awaited by market participants for clues regarding the outlook for monetary policy," said Eric Theoret, currency strategist at Scotiabank in Toronto. "Clues regarding the outlook will arise from the discussion of other, more active measures that some of the more dovish activist policymakers may have sought to pursue." The euro was down 0.1 percent against the dollar at $1.2236, not far from the low of $1.2225 and analysts cautioned about a possible test of the June 2010 trough of $1.1875. The Fed minutes, due for release at 2 p.m. EDT (1800 GMT), will throw more light on the central bank's plans after U.S. policymakers expressed differing opinions on the need for more easing. "If we do get some announcement of more QE (quantitative easing) in the U.S. then it will provide support for euro/dollar and we could see a squeeze of short euro positions," said Paul Robson, currency strategist at RBS in London. "But the euro will stay weak on low yield, weak growth and debt uncertainty." Analysts said any renewed rise in Spanish and Italian government debt yields could push the euro down further as concerns about political hurdles and scepticism over the euro zone's decision-making process grow. The ECB's rate cut removed a pillar of support for the euro, raising chances it could become a funding currency of choice for buying higher-yielding assets. The euro fell to its weakest against sterling since late 2008, while it hit an all-time low against the Australian dollar. The Australian currency also gained against the U.S. dollar , backed by its higher Australian yields. It was last up 0.5 percent at $1.0241. UNCERTAIN ROAD AHEAD Some market players had been hoping for a quick ruling from Germany's Constitutional Court on whether the European Stability Mechanism and planned changes to the euro zone's budget rules were compatible with German law. But the decision looks likely to take several weeks, with Finance Minister Wolfgang Schaueble saying he hoped a judgment would be passed before the autumn. "People will be aware the non-decision we have got (from the court) might be a severe problem if yields really pick up and then euro/dollar will come under pressure," said Lutz Karpowitz, currency strategist at Commerzbank in London. There were also concerns about Italy, whose Prime Minister Mario Monti said on Tuesday the country could be interested in tapping the euro zone's rescue fund to ease its borrowing costs. The euro fell to a five-week low against the yen but recovered to trade 0.3 percent higher at 97.55 yen. The dollar recovered to trade 0.4 percent higher against the yen to 79.70 yen holding well above chart support at its 200-day simple moving average at 78.98, as investors positioned ahead of the outcome from the Bank of Japan's two-day policy meeting beginning on Wednesday. The BoJ is expected to hold off on easing monetary policy despite moves in that direction last week by central banks in the euro zone, Britain and China.
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