FOREX-Euro rally pauses, but gains may resume on ECB optimism
* Prospect of ECB action to help Spain, Italy limits falls * Euro falls vs sterling after BoE inflation report By Gertrude Chavez-Dreyfuss NEW YORK, Aug 8 (Reuters) - The euro slid against the dollar on Wednesday, weighed down by soft German economic data and profit-taking after three days of gains, but optimism that the European Central Bank will act to lower Spanish and Italian borrowing costs could limit losses. The euro also sold off against sterling after the Bank of England gave no indication it would provide further stimulus, putting more pressure on the euro zone's common currency. Wednesday's economic numbers took the steam out of the euro's recent rally. Industrial output in Germany, the euro zone's biggest economy, fell slightly more than expected in June. Germany also reported that imports fell in June for the second time in three months, and exports also dropped. "The reports reminded investors that regardless of what the ECB does to bring down government borrowing costs, the real economies of Europe, even Germany's, continue to decline," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "Still, the euro's downside should be limited by hopes that a major move by the ECB is imminent," he added. Investors are expecting the ECB to step in and buy Spanish and Italian bonds and rein in their soaring yields. In midday New York trading, the euro was down 0.3 percent at $1.2367, after hitting a one-month high of $1.2443 on Monday. It dropped past reported stop-loss orders at $1.2350, before recovering slightly. In general, the euro's outlook remained positive on the daily charts for as long as $1.2132 minor support holds, which is this month's low, analysts said. The rebound from the $1.2040 trough, a more than two-year low hit on July 24, is expected to continue. Some analysts cautioned, however, that any euro rebound will be susceptible to profit-taking as the euro zone has yet to turn the corner. Italy on Tuesday reported that its economy shrank further into recession in the second quarter, while Germany reported a fall in industry orders in June that was worse than forecast. "With the market looking to short euros across a range of investor types, the ECB's comments last week may well see euro/dollar squeeze higher through August," wrote Paul Robson, currency strategist at RBS Securities in London. "However, this looks set to generate better levels to establish short euro exposures." Sterling rose against the euro after BoE Governor Mervyn King appeared cautious about future interest rate cuts, surprising investors. The euro last traded down 0.5 percent versus the pound at 78.95 pence. Earlier, the BoE slashed inflation and growth forecasts in its Quarterly Inflation Report as the euro zone crisis continued to take a toll. Prior to Wednesday, the euro had rallied, in tandem with stock markets and riskier currencies, following a pledge by ECB President Mario Draghi last week to save the euro from disintegration. Market players have so far been unwilling to test the ECB's resolve, and some banks have forecast the euro will push higher over the coming weeks. STERLING RISES Sterling reversed earlier losses against the dollar to hit a session high of $1.5677. It was last up 0.3 percent at $1.5657. Traders had sold the pound in recent days on expectations that downbeat BoE forecasts would lead speculators to position for more monetary easing. But the report suggested the BoE was in no hurry to provide more stimulus, causing those bets to be unwound and helping the British pound, traders said. The yen rose as global stock markets came under pressure and investors sought safe-haven assets and currencies. The euro fell 0.5 percent to 96.98 yen while the dollar was down 0.2 percent at 78.41 yen. The dollar has stayed in a range between 77.90 and 78.80 yen for the past two weeks. But analysts said expectations of more U.S. monetary easing may hurt the dollar. Boston Federal Reserve Bank President Eric Rosengren, who is known to favor a more activist approach to stimulating growth, said on Tuesday the Federal Reserve should launch another bond-buying program of whatever size and duration was necessary to get the economy back on its feet. Traders also said there was potential for fund repatriation by Japanese institutional investors, which could also weigh on the dollar against the yen in the near term. August typically sees large bond redemptions in U.S. Treasuries as well as coupon payments, and traders say Japanese investors holding Treasuries could potentially sell the dollar against the yen to bring home some of the proceeds.
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