Euro hunkers down before Fed decision

SYDNEY Tue Jul 31, 2012 7:28pm 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 G3 currencies were expected to mark time in Asia on Wednesday, following another listless offshore session as the Federal Reserve policy decision loomed, a day ahead of the European Central Bank's own meeting.

But China's official manufacturing PMI, due around 0100 GMT, could add a bit of spice to local trading, with markets looking for signs the world's second-largest economy is stabilising thanks to increased policy support.

Any disappointment there would add to nerves in a market already growing doubtful that both the Fed and ECB will do enough to spur their respective economies.

The euro was at $1.2294, having traded in an inside-day $1.2249/2331 range on Tuesday that suggested no conviction in the market. It was equally subdued on the yen at 96.04, after drifting in a slim 95.75-96.28 range on Tuesday.

Investors, however, took a bit of profit on high-beta currencies like the Australian dollar, knocking it down to $1.0488 from off a four-month peak of $1.0538.

The Aussie also retreated from a record high versus the euro, which rose to A$1.1718 from a trough around A$1.1638.

Traders said many of the moves were due to month-end flows as well as positioning ahead of the key event risks.

Due at 1415 GMT, the U.S. central bank is widely expected to stand pat on rates for now, although some diehard optimists believe it will lay out the groundwork for further bond purchases in order to spur a sluggish economic recovery.

"We are looking for, at most, a chance in the Fed's language that extends low rates through at least early-2015, which won't be the stimulus bump market participants have been hoping for. Nonetheless, investors are largely mixed on what they feel the Fed will do going forward," said Christopher Vecchio, currency analyst at DailyFX.

With the euro undecided, the dollar index .DXY also put in an unimpressive performance, trading between 82.505 and 82.888, hovering above a three-week trough of 82.343 set late last week.

Against the yen, the greenback bought 78.12, still trapped in a 78.00-78.70 range seen in the past week.

On Thursday, the ECB will get its turn in the sun, although market enthusiasm for big action has already dissipated somewhat amid continued objection from Germany.

Germany's finance ministry reiterated its view on Tuesday that there is no need to grant a banking licence to the euro zone's new bailout fund, a move that could enable it to buy virtually unlimited amounts of debt issued by troubled euro zone states.

Euro zone data on Tuesday continued to paint a dire picture for a region desperately in need of fresh stimulus from policymakers. Joblessness in the euro zone has hit its highest level since the single currency was born.

"Given that EUR short positions are stretched, we view that the EURUSD and EUR crosses remain prone to upside risks on potential headlines from ECB/Bundesbank/eurozone politicians ahead of the ECB's meeting on Thursday," analysts at BNP Paribas wrote in a client note.

(Editing by Wayne Cole)

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