FOREX-ECB comments cap euro, Australian dollar falls on rate cut

Tue May 7, 2013 4:34am EDT

Related Topics

* Australian dollar drops after RBA cuts policy rate

* Euro softens after dovish comments from ECB head

* Draghi says ready to cut rates further if needed

By Anooja Debnath

LONDON, May 7 (Reuters) - The euro stayed under pressure on Tuesday on the ECB chief's comments on further rate cuts, while Australia's dollar slid to a two-month trough after its central bank cut rates to a record low.

The market had been evenly divided on the chances of the easing decision by the Reserve Bank of Australia, but prospects of further loosening will likely weigh on the currency for now.

The Australian dollar, was down 0.4 percent at $1.0205. It had broken through support around $1.0220 to fall to $1.0178 after the RBA cut rates by 25 basis points to 2.75 percent and indicated there was room to ease policy further.

This was the Australian dollar's lowest since March 4 and traders cited support at that day's low of $1.0116.

"The market has clearly taken the RBA rate cut as signalling not just a shift in timing, but also that ultimately rates will fall further than was previously thought and that is being negative for the Aussie," said Adam Cole, global head of FX strategy at RBC Capital Markets.

"For us, however, it is more an issue of timing and we don't expect the Aussie to fall much from here ... it will likely form a base around $1.02 and crawl back higher from there."

The euro was at $1.3079, flat on the day after having pulled back from Monday's high of $1.3141.

It slipped after European Central Bank President Mario Draghi said on Monday the bank would monitor incoming euro zone data closely and be ready to cut rates further, including the deposit rate currently at zero.

"For southern European countries, a euro above $1.30 would be too high for their economy. Among major central banks, the ECB has been the only bank that is not expanding its balance sheet. But it will likely consider such a step," said Minori Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ.

Initial support for the euro is seen around $1.3024, the 76.4 percent retracement of its April 24-May 1 rally and the 55-day moving average at $1.3021. Traders cited bids from Asian sovereign accounts at sub-$1.3050 levels which acted as support.

The euro also lost some ground against the yen and was down 0.2 percent at 129.59 and was still some way off a 3-year high of 131.10 set last month.

The pullback in the euro saw the dollar index drift up to 82.281, well away from last week's 2-month low of 81.331.

The dollar gave up some of its recent gains against the yen as Japanese traders returned to the market after the four-day long weekend.

Analysts said the U.S. currency would have another go at the tough resistance at 100 yen as the Japanese currency stayed under pressure due to the Bank of Japan's aggressive monetary easing stance.

The dollar slipped 0.2 percent to 99.09 yen, after having risen as high as 99.455 on Monday.

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