FOREX-Euro rises after data but ECB speculation caps gains

Mon Nov 4, 2013 9:32am EST

Related Topics

* Euro touches lowest since Sept. 18, implied vols rise

* Speculation grows ECB may loosen policy as early as this week

* Australian dollar rises on stronger retail sales

By Wanfeng Zhou

NEW YORK, Nov 4 (Reuters) - The euro edged higher from a six-week low against the dollar on Monday helped by data showing manufacturing in the euro zone accelerated last month, but gains were limited by speculation the European Central Bank may soon cut interest rates.

Traders said the euro could stay under pressure before the ECB's policy meeting on Thursday. Plunging inflation in the region has led a growing number of banks, including UBS and RBS, to forecast a cut in the refinancing rate as soon as this week.

"European manufacturing PMIs show marginal improvement but (the data) doesn't alleviate concerns of a dovish ECB later in the week," said Scott Smith, market analyst at Cambridge Mercantile Group.

The euro gained 0.1 percent to $1.3497, after a survey showed the manufacturing Purchasing Managers' Index (PMI) rose to 51.3 from September's 51.1, in line with an earlier flash reading and with the consensus forecast of economists.

Earlier, the euro fell to $1.3441, according to Reuters data, its lowest level since Sept. 18 and well below a two-year high of $1.3831 struck on Oct. 25.

The drop in the euro, which shed more than 2 percent last week, triggered a rush to hedge against further weakness. One-month euro/dollar implied volatility, a gauge of how choppy a currency is expected to be, jumped to its highest in two months at 7.525 percent.

A cut in the deposit rate, at which banks park excess cash with the ECB, to negative territory would make holding the euro expensive and force investors to sell it. It would also make the euro a funding currency for carry trades, where investors borrow in a cheap currency to buy a higher-yielding one.

"While we don't expect the ECB to cut the refi rate this week, given the downside risks to inflation from a stronger currency, we expect (ECB chief) Mario Draghi to possibly flag a cut in the deposit rate. That would be negative for the euro," said Manuel Oliveri, FX strategist at Credit Agricole.

The euro's bounce nudged the dollar index down from a six-week high of 80.930 hit in Asia, the strongest since mid-September. It last stood at 80.658, down 0.1 percent on the day.

The dollar had risen in Asia after comments from Federal Reserve Bank of Dallas President Richard Fisher. Speaking at a conference of business economists in Sydney, Fisher said he was concerned that corporate credit spreads have narrowed too much and added that he does not see the Fed's balance sheet rising to $6 trillion or more.

Against the yen, the dollar was little changed at 98.66 yen .

The Australian dollar edged higher, supported by stronger than expected retail sales. It rose 0.6 percent to $0.9497 , edging away from Friday's three-week low of $0.9421.

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