FOREX-Euro holds upper hand, dollar drifts ahead of Fed

Mon Dec 16, 2013 7:02pm EST

Related Topics

* Surprisingly strong euro zone manufacturing data boosts euro

* Uncertainty over Fed policy keeps dollar shackled

* Aussie, near 3-month low vs USD, braces for event-packed day

By Hideyuki Sano

TOKYO, Dec 17 (Reuters) - The euro held the upper hand on Tuesday after surprisingly strong euro zone manufacturing data, while uncertainty over when the Federal Reserve would start to trim its economic stimulus programme kept the dollar on the defensive.

The euro traded at $1.3762, maintaining its slim gains on Monday and not far from a two-year high of $1.3811 reached last week.

The common currency was broadly firm, holding near a four-week high against sterling hit on Monday and staying within reach of five-year peak on the yen and 3 1/2-year high against the Australian dollar.

It last traded at 0.8443 pound, 114.80 yen and A$1.5388 respectively.

The euro gained traction after a report on Monday showed German manufacturing activity and the flash Eurozone Composite Purchasing Managers' Index both beat forecasts in December.

That did not come without misgivings, however, as activity in France dropped to a seven-month low.

Also taking some shine out of the euro, ECB President Mario Draghi affirmed on Monday that interest rates in the region will stay low, if not lower, for longer, highlighting the still-fragile state of the euro zone economy.

Data in the United States continued to point to an economy building good momentum, with industrial production posting its biggest increase in a year in November, and finally pushing industrial output above its pre-recession peak.

That is another milestone that could push the Federal Reserve to reduce its stimulus soon, though markets are still not convinced if that's going to happen at the upcoming meeting this week, or some time early next year.

Even if the Fed does taper its bond buying, it could signal it plans to keep rates low for a longer period, complicating the dollar's outlook further.

Uncertainty over the Fed's policy outlook kept the dollar index standing at 80.11, not far from six-week low of 79.76.

Against the yen, the dollar traded at 103.05 yen, having slipped from five-year high of 103.925 yen hit on Friday.

While many traders looked to the outcome of the Fed's two-day meeting starting on Tuesday, the Australian dollar will also garner some attention in Asia as markets brace for the minutes of the Reserve bank of Australia's policy meeting later.

The Australian dollar fetched $0.8941, near a 3-month low of $0.8909 set on Friday. Against the yen, it stood at 92.19 yen, holding above an important support around 91.80, its 100-day moving average and Dec. 4 low.

The Aussie has been under pressure for months from the central bank's jawboning but some analysts suspect the impact of verbal intervention may start to wane.

"The RBA will try to talk down the Aussie and I guess there will be Pavlovian response to sell the Aussie on the headline. But it's getting harder for the RBA to avoid its verbal intervention seen as a bluff when there is limited chance of rate cut and Aussie-selling intervention," said Masafumi Yamamoto, strategist at Praevidentia Strategy.

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