FOREX-Euro falls as investors anticipate dovish ECB

Thu Jul 4, 2013 4:46am EDT

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* Euro seen vulnerable before ECB decision

* ECB's Draghi expected to sound a dovish tone

* Portugal worries remain, volumes thin due to U.S. holiday

By Jessica Mortimer

LONDON, July 4 (Reuters) - The euro fell on Thursday and was seen vulnerable before a European Central Bank meeting where President Mario Draghi is likely to point to a weak euro zone economy and may hint it needs more help.

Concerns about political tensions in Portugal also weighed as the country's prime minister tried to defuse a crisis that has seen ministers resign and which could derail the country's efforts to emerge from an international bailout.

Trading volumes were light due to a public holiday in the United States which could lead to volatile price action. Some investors were wary of taking big positions before monthly U.S. jobs figures on Friday.

If strong, this data would add to expectations the U.S. Federal Reserve will scale back stimulus later this year due to an improving U.S. economy, boosting the dollar.

The euro was down 0.1 percent at $1.2989, having fallen as low as $1.2923 on Wednesday, its weakest since late May. Traders reported offers to sell the currency above $1.3010.

The ECB is expected to keep interest rates steady when it announces a decision at 1145 GMT, but Draghi is likely to sound a dovish tone at a news conference at 1230 GMT, highlighting the difference between euro zone and U.S. monetary policy.

"The likelihood of a dovish statement from the ECB is high," said Hans Redeker, head of global foreign exchange strategy at Morgan Stanley. He added there was a chance the ECB could issue forward guidance on monetary policy which would hurt the euro.

"A lower exchange rate is required to avoid the euro zone falling into deflation, and forward guidance is a tool that could be used ... If they do this it would have a significant market impact."

Analysts said the euro was particularly susceptible to falls against the safe-haven yen, especially if markets fret about troubles in Portugal reigniting the euro zone debt crisis.

The euro was down 0.4 percent at 129.47 yen. Further falls could leave it with potential to target the mid-June low of 128.045 yen.

"As long as the crisis is contained within Portugal, the impact on broader markets will be limited. But if there is contagion to Italy and Spain, then there would be big trouble as Germany is unlikely to offer any strong support ahead of its election in September," said Minori Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ in Tokyo.

Sterling was also lower, trading down 0.2 percent at $1.5247 before a Bank of England policy decision at 1100 GMT which will be the first meeting under new governor Mark Carney.

There was some speculation Carney may break with convention and release a statement even if the bank takes no action.

The dollar index, which measures the U.S. currency's value against a basket of currencies, was up 0.1 percent at 83.294, near a five-week high of 83.717 hit on Wednesday.

But the dollar fell 0.2 percent against the yen to 99.70 yen as the Japanese currency rose broadly, helped by its gains against the euro.

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