FOREX-Euro climbs vs U.S. dollar though caution remains ahead of ECB

Wed Apr 24, 2013 3:44pm EDT

Related Topics

* German business morale falls short of expectations
    * Euro gains vs US dollar after hitting three-week low
    * US dollar falls vs yen after durable goods data
    * US dollar still within sight of 100 yen mark

    NEW YORK, April 24 (Reuters) - The euro rallied against the
U.S. dollar on Wednesday, reversing a drop to a near three-week
low earlier in the day, as optimism that Italy can resolve its
political gridlock offset weak German data.
    The euro had fallen after a survey by Germany's Ifo
think-tank showed business sentiment dropped for a second month
in April, fueling concerns about the health of the euro zone's
largest economy and fanning speculation that the European
Central Bank will cut rates soon. 
    The euro was already vulnerable after German purchasing
managers' index data on Tuesday showed business activity
dropping sharply in April. 
    "The release of softer IFO data from Germany drove a brief
decline in the euro, albeit one that was quickly retraced," said
Eric Theoret, forex strategist at Scotiabank in Toronto.
    The euro dropped to $1.2954, its lowest since April 5,
before recovering to trade at $1.3019, up 0.2 percent. An
Asian central bank and a supra-national investor were cited as
buyers earlier in the global trading day.         
    "With regards to the outlook for the ECB, focus has turned
to next Thursday's meeting, with rising expectations for an
easing in monetary policy," Theoret said. 
    The European Central Bank currently has rates at a record
low 0.75 percent.
    Recent comments by ECB policymakers have stressed declining
inflation and poor euro-zone growth prospects, suggesting
policymakers are leaning toward a further cut at their next
meeting on May 2. 
    The ECB has room to act on interest rates if economic
conditions remain weak, ECB Vice President Vitor Constancio said
on Wednesday. 
    With interest rates in the United States and Japan at or
near zero, an ECB rate cut would diminish the euro's advantage.
The ECB, however, has refrained from pumping massive amounts of
money into the euro zone through asset purchases, unlike the
Federal Reserve or the Bank of Japan's actions.
    And investors may view an ECB rate cut as positive for the
euro because the central bank is taking action to stimulate
economic growth. 
    Traders said the euro drew some support from reports that
Italian President Giorgio Napolitano had called on Enrico Letta,
deputy head of the centre-left Democratic Party, to form a new
coalition government. 
    The formation of a government in the euro zone's
third-largest economy after months of uncertainty would offer
relief to investors looking to buy assets in the region.
 
    "But the risk-reward in the euro is to sell it into any rise
to $1.3100/50," said Mankash Jain, head of foreign exchange and
investment management at hedge fund Solo Capital in London. "The
data from Germany has been weak, the Ifo was weak, and if the
ECB were to cut rates next week, the euro would fall."
    
    DOLLAR WEIGHED BY WEAK U.S. DATA 
    The U.S. dollar was little changed against against the yen
in a volatile session after data showed orders for long-lasting
U.S. manufactured goods, known as durable goods, recorded their
biggest drop in seven months in March and a gauge of planned
business spending rose modestly, adding to signs of a slowdown
in factory activity. 
    While the yen remains weighed by the Bank of Japan's
ambitious bond-buying program announced this month, concerns
about global growth have lifted the currency recently.
    The dollar hit a four-year high of 99.94 yen on April 11
after the Bank of Japan unveiled a sweeping monetary stimulus
program that entails buying $1.4 trillion of bonds in less than
two years. 
    The dollar last traded at 99.45 yen, little changed
on the day.  
    Many traders are braced for a test of the 100-yen mark in
coming days, although offers were reported around 99.80-85 yen
that could limit the dollar's gains in the short term.    
    "Price action this week can be characterized as 'sideways,'
best displayed by the euro/dollar's inability to shake $1.3000,
or the dollar/yen's inability to break through 100 yen," said
Christopher Vecchio, currency analyst at DailyFX in New York.
"There's significant event risk coming up over the next week
that should keep price action relatively contained until the
events come to pass: the Bank of Japan meeting on Friday, the
U.S. first-quarter GDP release on Friday, and the European
Central Bank meeting next Thursday."
    Some USD5.18 billion in euros changes hands on
Wednesday,using Reuters Dealing data, compared with USD4.23
billion on Tuesday. USD2.59 billion in yen trades,
compared with USD3.164 billion on Tuesday, using Reuters Dealing
data.
FILED UNDER:
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article