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FOREX-Euro lower vs dollar with risk of ECB disappointment
* Euro lower but supported by expectations of bold ECB action
* Risk of disappointment limits upside to euro
* ISM numbers could sway U.S. dollar
MEW YORK, Sept 4 (Reuters) - The euro fell against the dollar as the New York session opened on Tuesday with investors adjusting positions ahead of a European Central Bank meeting on Thursday with speculation mounting that the bank will unveil steps to tackle the region's debt crisis although concerns remain the plan may lack detail.
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 Thursday, at which policymakers are expected to announce a bond-buying scheme 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 the additional cost of holding assets perceived to have higher risk.
"The euro is flat against the U.S. dollar while trading around 1.2600, close to levels not seen since early July, and supported by hints detailing upcoming policy action ahead of Thursday's ECB meeting," said Eric Theoret, currency strategist at Scotiabank in Toronto. "ECB President Draghi has provided additional detail regarding his plans for sovereign bond purchases, suggesting a preference for bond maturities between two and three years."
The euro was last down 0.1 percent at $1.2579, not far from two-month high of $1.2636 touched last week.
Analysts said with expectations of ECB action running high there was some scope for disappointment which could see the euro fall after the meeting. Investors are hoping that 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 towards $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 profit at their $1.27 target if it was achieved 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.
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 programme, known as quantitative easing (QE), later this month.
Investors are likely to use U.S. non-farm payrolls data due on Friday to help gauge the strength of the economy and the likelihood of further easing.
Before that, the U.S. Institute for Supply Management's manufacturing data is due on Tuesday and it could support speculation of a Fed move if it reflects similar surveys out of Europe and Asia on Monday that showed factory activity slowing around the world.
"Dollar bears may find further support from the August manufacturing ISM," said Audrey Childe-Freeman, head of foreign exchange strategy.
"Bearing in mind disappointing manufacturing PMIs elsewhere, the risk has to be tilted to the downside. A sub-50.00 outcome and associated contraction talks would most likely keep QE3 talks alive and leave the dollar vulnerable."
The dollar was, however, firmer against the yen helped in part by buying from Japanese importers. The U.S. dollar was up 0.1 percent against the yen at 78.34 yen.
Meanwhile, the Australian dollar edged higher after Australia's central bank kept interest rates unchanged at 3.5 percent as widely expected. The growth-linked Aussie was last up 0.1 percent at $1.0256.
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