FOREX-Euro steady but vulnerable to ECB disappointment

Mon Sep 3, 2012 6:25am EDT

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* Expectations of ECB action this week supports euro
    * China, euro zone manufacturing data lags forecasts
    * Aussie drops to six-week low versus U.S. dollar

    By Anirban Nag
    LONDON, Sept 3 (Reuters) - The euro held steady on Monday,
supported by expectations the European Central Bank will detail
plans this week to stem the debt crisis, but vulnerable to the
risk of disappointment and flagging growth prospects.
    The growth-linked Australian dollar fell to fresh six-week
lows against the dollar and the yen as investors sold after
signs of economic weakness in China and weak Australian data.
    The euro stood at $1.2570, flat from late U.S. trade
on Friday and off an eight-week peak of $1.2638 set that day
after a speech by Federal Reserve President Ben Bernanke fanned
expectations of further stimulus to revive growth.
    Traders cited option barriers at $1.2650, with resistance at
the July 2 high of $1.2681. Trade was slow with U.S. markets
closed for a holiday.
    The euro was underpinned by expectations the ECB will unveil
a bond buying programme, probably at its policy meeting on
Thursday, aimed at lowering borrowing costs for peripheral euro
zone countries such as Spain and Italy.
    That is expected to lower the risk premia -- the additional
cost over low-risk securities -- of holding European assets as
well as the euro.
    "While the euro could rally to the $1.2670/80 region as
short positions are trimmed, we are likely to see investors sell
into it as there is a great of deal of uncertainty about what
the ECB may announce on Thursday," said Jeremy Stretch, head of
currency strategy at CIBC World Markets.
    "Along with bond-buying plans there will be updates on
growth and inflation. So there is a risk of disappointment."
    The ECB is likely to downgrade growth forecasts this week,
adding to pressure for a cut in interest rates in coming months.
Data on Monday showed German and French factory activity
contracted in August.  
    ECB President Mario Draghi skipped last week's Jackson Hole
symposium to try to smooth over a deep rift within the ECB over
the bond scheme that is increasingly being played out in public.
    However, investors expect Draghi will prevail over
opposition to the programme, notably from Germany's Bundesbank.
Reflecting this, speculators have for several weeks cautiously
trimmed bets on the euro falling.
    Data from the U.S. financial watchdog showed on Friday that
speculators have cut their bets against the euro to the smallest
since April. 
         
    FED EASING PROSPECTS
    The dollar was under pressure against the yen after
Bernanke's speech. It last stood at 78.36 yen, near the
three-week low of 78.187 hit on Friday. But there was strong
support for the dollar at 78 yen with Japanese importers looking
to buy the U.S. currency at lower levels, traders said.
    Bernanke said high unemployment is a grave concern and that
the Fed would act as needed to strengthen the recovery, though
he did not explicitly signal an imminent move, providing
temporary relief to the U.S. dollar. 
    A below-forecast U.S. jobs report this Friday could bolster
expectations of looser monetary policy and weigh on the dollar
in the run-up to the Fed's Sept 12-13 policy meeting, traders
said.
    "However, we see strong support for the dollar at 78 yen and
we think the Bank of Japan will try and counter any Fed action
with further easing of its own when it meets the following
week," said Ned Rumpeltin, G-10 currency strategist at Standard
Chartered Bank.
    "The BOJ remains concerned about the yen's strength, and a
third round of QE from the Fed will probably push them into
renewed action."
    Meanwhile, the Australian currency fell to a near six-week
low against the U.S. dollar, hit by a double whammy of weak
Chinese and poor domestic data. The Aussie slid to a low of
$1.0240, retreating from Friday's high of $1.0355.
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