Euro squeezed higher, RBA keeps AUD bulls nervous

SYDNEY Mon Oct 1, 2012 7:24pm EDT

SYDNEY (Reuters) - The euro stayed bid in Asia on Tuesday, having bounced from a three-week trough against the greenback as investors cut bearish positions, while the Australian dollar floundered ahead of a possible cut in domestic interest rates.

The single currency stood at $1.2890, little changed from late New York levels, but well off Monday's trough around $1.2804.

Traders said demand for safe-haven currencies like the dollar and yen faltered after data showed U.S. manufacturing grew slightly in September for the first time since May.

That saw the dollar index .DXY dip to a low of 79.575, from a three-week peak of 80.147. It was last down 0.4 percent at 79.791. Against the yen, the dollar fetched 78.04, having retreated from a one-week high of 78.15.

Many of the moves reflected position adjustments as investors were still waiting for Spain to seek a bailout and trigger the European Central Bank's bond-buying program, traders said.

Also, Moody's has yet to announce its review of Spain's rating, which could see Madrid's credit standing cut to junk status.

European officials said on Monday that Spain is ready to request a bailout as early as next weekend, but Germany has signaled that it should hold off.

Investors were also wary of the Australian dollar ahead of the Reserve Bank of Australia's (RBA) policy decision due at 0430 GMT. Markets have priced in a 62 percent chance of a quarter-point cut in the 3.5 percent cash rate.

Analysts polled by Reuters on Friday generally expected no change, although many say they would not be surprised if the RBA decided to cut.

A stubbornly high dollar, coupled with a sharp slide in the prices of some of Australia's top exports and a cooling in the mining sector all argued for an easing, analysts said.

Data on Monday offering more evidence of softness in China's economy, Australia's single largest export market, also supported the case for a cut, traders said.

Still, many economists expect the RBA would wait for further signs of deterioration in the economy as well as a quarterly inflation report due late this month, before pulling the trigger at the November meeting.

The Aussie traded at $1.0361, having on Monday shed more than a full cent from a peak of $1.0474 set late last week.

"The RBA meeting presents quite a risk to short AUD positions, should they decide to keep rates unchanged," said Mary Nicola, a strategist at BNP Paribas.

"Our economists expect the RBA to stand pat and cut in November. The RBA is likely to highlight the weakness in China and the potential ramifications on the economy. This would potentially set the stage for a cut in November."

(Editing by Wayne Cole)

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