FOREX-Euro little moved by ECB, eyes on news conference

Thu Apr 3, 2014 8:10am EDT

Related Topics

* Euro unmoved by ECB decision, flat after dip in Asia

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* Non-farm payrolls key to further dollar gains (Adds new quotes, updates prices)

By Patrick Graham

LONDON, April 3 (Reuters) - The euro held broadly steady on Thursday after the European Central Bank kept interest rates on hold, with eyes fixed on the bank's news conference for signs of whether it is any closer to taking other steps to boost growth.

Unlike in January and February, there had been few if any mainstream voices in the market predicting action from the bank in the form of a cut in its official interest rates and there was little reaction when it held fire.

Some still saw a chance that President Mario Draghi's news conference at 1230 GMT will yield a sign that the bank is edging towards steps to push more cash into the economy. But any actual action this month on that front too is seen as an outside bet.

The euro dipped just before the decision but took back those losses immediately after the decision.

"We did see a quick swing (for the euro) around the decision, some people clearly were trying to use it but that quickly died," said Alvin Tan, a strategist with SG Bank in London. "We don't expect too much from Draghi at the meeting either, the bank still looks pretty comfortable with the disinflation we have seen."

A number of ECB policymakers have played down any concerns about a fall in inflation to 0.5 percent, casting it as temporary, and Draghi's own line is that the euro zone is in no danger of falling into a debilitating cycle of deflation.

But many in the market have also read comments from a number of ECB officials in the past month as evidence that the bank is concerned by the euro's gains so far in what was expected to be a strong year for the dollar.

"I think Mr. Draghi may find a line or two that sound dovish," said Jane Foley, a strategist with Rabobank in London. "If he does that may weaken the euro somewhat."

After gaining almost half a cent overnight, the dollar was flat against the euro at $1.3770.

The main move of the past two weeks on major currency markets has been the dollar's steady march higher against the yen, awakening hopes that the greenback may finally be set to deliver on the break higher predicted by many banks in January.

The dollar has gained almost 3 percent against the yen since U.S. Federal Reserve chief told markets on March 19 that the Fed might raise interest rates next spring. It hit a new 10-week high overnight before retreating a touch but was still higher than a day earlier at 103.89 yen. U.S. jobs data on Friday may be the decisive factor for any further gains.

"There is a lot of resistance (to more dollar gains) around 104 yen and we may not break that today," said a dealer with one bank in London. "The key to any move higher will be non-farm payrolls tomorrow."

LOW-FLATION

The head of the International Monetary Fund on Wednesday called on the ECB to ease policy, warning "low-flation" in advanced economies risked undercutting an already sluggish global recovery.

But U.S. data has generally improved after a dip in fortunes now put down largely to harsh winter weather. Worries over China and Ukraine that prompted investors to seek the relative security of the yen have also slipped at least momentarily off the agenda.

"I do get the sense that the market is becoming much more constructive about the dollar," said Rabobank's Foley.

"The March numbers should be relatively clean of harsh weather and the market thinks payrolls will be relatively strong. As long as we don't see any big rush into safe havens, the dollar is heading higher against the yen."

Foley said in contrast she expected the euro to remain robust, pointing to the currency area's trade surplus and inflows of capital back into the southern member states worst hit by four years of turmoil over public finances.

Still, a Reuters poll of over 60 foreign exchange strategists taken this week predicted the euro would fall to $1.37 in one month, $1.33 in six and $1.29 in a year.

Steen Jacobsen, chief investment officer with leading retail FX platform Saxobank, sees the euro sinking to $1.25 this year on the back of more aggressive action later in the year to ease monetary conditions.

"You may argue that there is no real reason flows-wise for the euro to weaken, but I think for the lobbies and policymakers $1.40 is a line they cannot cross," he said. "I think it will get there and that will lead to action."

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