FOREX-Euro dips on investor caution before ECB meeting

Wed Mar 6, 2013 7:12am EST

Related Topics

* Euro faces pressure ahead of ECB meeting

* Bets on range-trade in yen grow popular, implied vols down

* Australian dollar benefits from growth data

By Nia Williams

LONDON, March 6 (Reuters) - The euro dipped against the dollar on Wednesday, weighed down by concerns the European Central Bank could flag future interest rate cuts after its monthly policy-setting meeting on Thursday.

European stocks rose, mirroring the record high hit on the Dow Jones industrial average and lending support to commodity currencies like the Australian dollar.

But the euro lagged those gains in growth-linked currencies and held within sight of a near three-month low of $1.2966 hit last week. It last traded down 0.15 percent on the day at $1.3030.

While the ECB is widely expected to keep policy unchanged at its meeting on Thursday, President Mario Draghi may use the news conference afterwards to hint at future loosening. Projections for both growth and inflation are likely to be on the low side, giving the central bank room to cut rates in coming months.

That could make any bounce rather fleeting and leave the euro pinned down well below its 15-month high of $1.3711 struck in early February, traders said.

"The market is not necessarily looking for a rate cut at this meeting, but for the first signal that it's now back on the table as a policy option in coming months," said Ian Stannard, head of European FX strategy at Morgan Stanley.

"That would be the trigger point for a move lower in the euro. There's still a good chance we will see $1.28 or $1.27."

Data on Wednesday confirmed the euro zone economy shrank by 0.6 percent in the final quarter of 2012, adding to headwinds for the single currency.

The political stalemate in Italy following inconclusive elections is also likely to keep the euro subdued.

"Investors are cautious about the euro before the ECB meeting tomorrow. The euro is still a sell on rallies and any bounce above $1.3105 should be sold into," said Jeremy Stretch, head of currency strategy at CIBC World Markets.

The growth-linked and higher-yielding Australian dollar got a boost from data showing Australia's economy expanded by 0.6 percent in the December quarter, and benefited also from improved risk appetite generally as the Dow Jones industrial average hit new heights.

The euro fell to A$1.2686, while the Australian dollar also rose 0.2 percent against the U.S. currency to US$1.0273, extending its recovery from an eight-month low of $1.0116 hit on Monday.

The Canadian dollar dipped to C$1.0284 per U.S. dollar, with the focus on a policy announcement by the Bank of Canada at 1500 GMT. Some are expecting the central bank to tone down its previous hawkish stance following disappointing economic data.

Investors will also be focusing on U.S. employment data at 1315 GMT which is forecast to show 170,000 jobs added last month. Analysts said a stronger-than-expected reading would probably help the dollar.

YEN DIPS

The dollar edged up 0.1 percent against the yen to 93.41 yen , moving away from a five-week low of 90.85 yen hit on Feb. 25. The euro was close to flat on the day at 121.73 yen.

The Bank of Japan kicks off its two-day policy-setting meeting on Thursday but the central bank is expected to hold fire this week and the market's attention is moving to April 3-4, the first policy review under new Governor Haruhiko Kuroda.

Kuroda is expected to be formally appointed as governor after confirmation by parliament and is an advocate of aggressive monetary easing.

Traders said one increasingly popular strategy is to bet on dollar/yen moving between 90-91 and 95 yen until April 4, using option strategies.

This has helped the dollar/yen's implied volatility to ease, with one-month volatility at around 11.6 percent, compared to a 1-1/2-year high around 13.5 percent hit last week.

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