FOREX-Euro edges higher but vulnerable to ECB meeting
* Markets cautious that euro strength may concern ECB
* Could dip further before ECB decision at 1245 GMT
* Broader trend for further gains intact
* Yen slips against euro, dollar, to stay weak
LONDON, Feb 7 (Reuters) - The euro edged higher on Thursday on buying by Asian sovereign investors, although most were cautious about aggressively adding bets in favour of the single currency before a European Central Bank rate decision.
While the ECB is widely expected to keep interest rates on hold when it announces its decision at 1245 GMT, investors will be on the lookout for comments from bank President Mario Draghi about any negative impact of a strong currency on the fragile euro zone economy.
While chances of that happening are slim, given the trade-weighted euro has risen only 3 percent since early last month, any hint of discomfort could drag the currency lower. On the other hand, if he sounds unconcerned by the euro's rise, the single currency is likely to bounce.
"The markets have been on hold ahead of the ECB meeting and there was some position consolidation prior to that," said Neil Mellor, currency strategist at Bank of New York Mellon
"The key question Draghi will be asked is about currency wars, and he will likely say currency moves should be set by the markets, leading most to assume that the ECB is not prepared to do anything and the euro will probably go a little higher at the end of the meeting."
The euro was up 0.3 percent at $1.3563, holding above this week's trough of $1.3458 plumbed on Tuesday and well shy of a 15-month peak of $1.3711 set on Feb. 1.
The single currency was up 0.4 percent at 127.22 yen , not far from its 34-month high of 127.71 yen hit on Wednesday on reported demand from some Russian and Middle East investors, traders said.
Draghi sounded optimistic about a euro zone recovery last month, helping set the stage for a sharp euro rally, lifting it against the dollar and yen and to a 15-month top against sterling.
The euro has risen more than 2 percent against the greenback so far this year and over 10 percent versus the yen, triggering strong protests from French politicians who fear a strong euro could derail exports and threaten a nascent euro zone recovery.
Germany has said the euro is not over-valued.
Vassili Serebriakov, strategist at BNP Paribas, said in a client note that the majority on the Governing Council will probably reason that the euro's strength is a result of real improvement in the financial markets and economic outlook, thus not warranting immediate action.
The other potential risk to the euro would come from any comments Draghi makes on the recent rise in money market interest rates after some banks repaid loans from the ECB early.
Strategists said that before the ECB meeting markets would focus on a Spanish bond auction at around 0930 GMT. Calls for Spain's prime minister to resign over a corruption scandal could dampen investor demand for Spanish bonds and this could push the euro lower.
The dollar was firmer against the yen at 93.75 yen on steady buying by a U.S. investment bank and putting it on course to test its 33-month peak around 94.075 yen hit on Wednesday.
With the Bank of Japan committed to open-ended asset purchases from 2014 and aiming for a 2 percent inflation target, pressure on the yen was likely to continue, traders said.
U.S. speculative accounts were still actively buying the dollar on dips, with stop-loss orders said to be placed at 93.20 yen and just below 93 yen.
"Some market participants may think the U.S. dollar is a little bit fast, to reach for 94, 95, so that's why we should wait for a while, to wait for new material," said Masashi Murata, a currency strategist at Brown Brothers Harriman in Tokyo.
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