Euro loses momentum, Aussie up on stimulus hopes

SYDNEY Mon Jul 30, 2012 7:35pm EDT

Euro notes are pictured at a bank in this photo illustration taken in Seoul June 18, 2012. REUTERS/Lee Jae-Won

Euro notes are pictured at a bank in this photo illustration taken in Seoul June 18, 2012.

Credit: Reuters/Lee Jae-Won

SYDNEY (Reuters) - The euro consolidated recent gains on Tuesday following a slew of negative economic news, while high expectations that major central banks were poised to add more stimulus helped keep risk currencies like the Australian dollar at multi-month highs.

The euro bought $1.2260, having retreated from a three-week peak near $1.2400. Good support is seen around $1.2216, a level representing the 50 percent retracement of its July 24-27 rally.

Data on Monday added to the urgency for policymakers to act soon with economic sentiment in the euro zone falling to near a 3-year low as the bloc's economy deepened its slump and businesses became more pessimistic.

"There's mounting hopes surrounding the European Central Bank interest rate decision...and it seems as though the central bank head will continue to embark on its non-standard measures in an effort to stem the risk for contagion," said David Song, currency analyst at DailyFX.

"We may see the Governing Council lean towards a zero interest rate policy as the region heads for a prolonged recession, and the central bank may have little choice but to implement a range of tools over the coming months as the outlook for growth and inflation falter."

Against the yen, the single currency fetched 95.82, down from a 1-1/2 week high around 97.33 set Friday. But on the high-flying Aussie, it plumbed a record low round A$1.1646.

The Aussie and other high-beta currencies have been among the best performers recently, thanks largely to expectations that both the ECB and Federal Reserve are moving closer to providing more aid to support their respective economies.

This will cement the status of both the euro and dollar as funding currencies of choice for carry trades, dealers said.

The Aussie was last at $1.0501, within easy reach of a four-month peak of $1.0508 set on Monday. It was near the top-end of an uptrend channel drawn from early June.

Markets were also keeping an eye on the Swiss National Bank's FX reserve allocations due on Tuesday amid talk the central bank has been buying the Australian dollar.

The modest pullback in the euro helped the dollar index .DXY edge off a three-week trough of 82.343 to 82.831. Against the yen, the greenback bought 78.15, remaining in a thin 78.00-78.60 band seen in the past week.

With the outcome of the Fed's meeting due on Wednesday and that of the ECB on Thursday, traders expect markets to turn subdued as investors retreat to the sidelines to await their decisions.

(Editing by Wayne Cole)