FOREX-Euro slips vs dollar ahead of ECB meeting

* Euro lower but supported by expectations of bold ECB
action
* Risk of disappointment limits upside to euro
* ISM numbers could sway U.S. dollar

NEW YORK, Sept 4 (Reuters) - The euro slipped against the
dollar o n T uesday as investors grew cautious on fears a European
Central Bank plan to tackle the region's debt crisis may lack
detail.
However, the currency held within its recent trading range.
The cost of insuring against a Spanish and Italian default
fell, lending some support to the euro. Analysts say it is
likely to hold its ground in the run-up to the ECB meeting on
Thu rsday, at which policymakers are expected to announce a
bond-buying plan to help lower Spanish and Italian borrowing
costs.
That speculation was reinforced on Monday when ECB President
Mario Draghi said central bank purchases of sovereign bonds of
up to three years maturity did not constitute state aid.
.
Any move by the ECB to stem the debt crisis is expected to
lower the additional cost of holding assets perceived to have
higher risk.
"Rumors of progress in the euro zone continue to swirl,
giving investors hope that the central bank will announce new
measures to lower peripheral yields and support the region's
economy," said Kathy Lien, managing director at BK Asset
Management. "Yet the euro/dollar is trading slightly lower this
morning because traders realize that during the debt crisis,
European policymakers have had a track record of
disappointment."
The euro was last down 0.2 percent at $1.2565, not
far from the two-month high of $1.2636 touched last week. U.S.
markets were closed on Mo nday for the national Labor Day
holiday, which may increase volatility in Tuesday's New York
session as traders have less time before the ECB meeting to
stake positions.
Analysts said with expectations of ECB action running high
there was some scope for disappointment, which could cause the
euro to fall after the meeting. Investors are hoping the ECB
will at least reveal the range of maturities that are eligible
for purchase and conditions are not too stiff for peripheral
countries to request help.
"There is room for disappointment if the plan lacks
specifics and that could see the euro drop toward $1.25," said
Chris Turner, head of currency strategy at ING. "But I think the
ECB is intent to get a floor under this debt crisis saga and it
is aware of the high expectations."
Morgan Stanley strategists said they did not expect the euro
to push much higher before the ECB meeting and would take
profits at their $1.27 target if it was reached before Thursday.
Additionally, investors are likely to be cautious about the
euro given the economy is struggling, putting pressure on the
ECB to lower interest rates in the coming months.
French President Francois Hollande said on Tuesday that an
EU leaders summit on Oct. 18-19 could finalize solutions, not
just on debt-stricken Greece but also Spain, whose government
has so far resisted seeking an EU bailout despite a deep
recession..
Italian Prime Minister Mario Monti said on Tuesday that the
European Union must take steps to bring down the bond yields of
countries that are being unjustifiably penalized by markets.
.

FED EASING PROSPECTS
Euro weakness against the dollar could be limited in the
near term, however, by speculation the U.S. Federal Reserve may
launch another bond buying program, known as quantitative
easing, later this month.
U.S. non-farm payrolls data due on Friday are expected to
provide an important gauge of the strength of the economy and
the likelihood of further Fed easing.
The dollar briefly trimmed gains against the euro on Tuesday
after a survey showed U.S. manufacturing shrank at its sharpest
clip in more than three years in August, the third straight
month of contraction, and firms hired the fewest workers since
late 2009..
"It's a disappointing number that can bring the Fed a step
closer to offering more support to the U.S. economy," said Joe
Manimbo, senior market analyst at Western Union Business
Solutions in Washington. "The construction number also added to
the disappointing tone of the ISM and as a result we have seen
the dollar surrender some of its early gains."
The dollar was firmer against the yen, helped in part by
buying from Japanese importers. The U.S. dollar was up 0.2
percent against the yen at 78.36 yen.