Euro takes breather after short-covering rally

TOKYO Thu Jul 26, 2012 7:53pm EDT

A picture illustration shows a 100 Dollar banknote laying on one Dollar banknotes, taken in Warsaw, January 13, 2011. REUTERS/Kacper Pempel

A picture illustration shows a 100 Dollar banknote laying on one Dollar banknotes, taken in Warsaw, January 13, 2011.

Credit: Reuters/Kacper Pempel

TOKYO (Reuters) - The euro steadied in early Asian trading on Friday after rallying on European Central Bank chief Mario Draghi's vow to hold the euro zone together, as investors prepared for U.S. second-quarter gross domestic product data later in the session.

The euro traded at $1.2278, down from a two-week high of $1.2330 hit overnight but well above a two-year low of $1.2042 marked on trading platform EBS earlier this week.

The median of forecasts from analysts polled by Reuters is for U.S. GDP growth of 1.5 percent in the second quarter, down from the first-quarter's 1.9 expansion.

While a weaker-than-expected figure would pressure the greenback by increasing expectations that the U.S. Federal Reserve could adopt further monetary easing steps at its meeting next week, a stronger figure wouldn't necessarily have the opposite effect, strategists said.

"It's highly unlikely even a strong print on GDP -- which would be out of the blue -- would really change the picture," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York.

"We know already the quarter was weak, so what's more important now is the forward-looking perspective. Even if there were signs of ECB action, it would not necessarily change the Fed's course going forward. The Fed stands very little chance of achieving its goals on employment without further stimulus," Wilkinson said.

The Fed might eventually opt for a third round of quantitative easing in the form of large-scale bond purchases, known as QE3, or cut the interest rate it pays banks on the excess reserves they leave with the central bank.

On Thursday, Draghi pledged to do "whatever it takes to preserve the euro," sending a strong signal that the bank could take steps to rein in soaring Spanish and Italian borrowing costs.

Barring any strong objections from Germany or other euro zone members, the apparently new resolve of the European central bank could put a solid floor under the euro for now, as investors pare bets that the currency would continue to tumble as European debt turmoil festered.

"The only thing that could undermine the euro now is some backtracking from Draghi or some countering view from members of the Bundesbank who might not favour peripheral bond purchases. Given that there's still a massive amount of euro shorts in the market, it wouldn't take much to turn a spark into a flame," Wilkinson said.

Against the yen, the euro also held its ground after gaining more than 1 percent on Draghi's comments, and was last buying 96.09 yen, moving away from a 12-year low of 94.12 yen touched on Tuesday this week.

Technical resistance now lies at 96.97 yen, which is the 38.2 percent retracement of the decline to the recent low from 101.62 on June 21.

The dollar held steady at 78.27 yen, above a seven-week low of 77.94 yen hit on Monday.

The increase in risk appetite benefited the Australian dollar, which rose to a one-week high of $1.0423 on Thursday and was last buying $1.0392.

(Additional reporting by Reuters FX analyst Krishna Kumar in Sydney; Editing by Joseph Radford)

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