FOREX-Growing threat of ECB action keeps euro subdued

Tue Apr 22, 2014 7:16am EDT

Related Topics

* ECB's Draghi speech may weigh on euro

* Euro zone PMIs and German IFO a key focus

* Chinese yuan drops to 14-month low vs dollar (Adds fresh quotes, details)

By Anirban Nag

LONDON, April 22 (Reuters) - The euro hovered near a two-week low against the dollar on Tuesday and fell to a two-month low against the British pound, as expectations the ECB will try to halt any further strengthening kept investors away from the single currency.

European Central Bank President Mario Draghi recently made clear the euro's strength is a possible trigger for the central bank to ease monetary policy. He is scheduled to give a keynote speech in Amsterdam on Thursday.

ECB executive board member Benoit Coeure said on Tuesday that there was further margin to reduce the main interest rate below 0.25 percent and that the strength of the euro could be keeping inflation too low.

But until the ECB takes action, traders said the euro was unlikely to weaken much, thus keeping it tied to a range.

The euro, which slipped to a two-week low of $1.3785 earlier in the day was trading slightly higher at $1.3815 amid low volumes as traders returned from the long Easter weekend. It was down 0.1 percent against the pound at 82.01 pence, its lowest level since late February.

Investors are also awaiting euro zone 'flash' PMI surveys on Wednesday while the German IFO institute's monthly reading of business sentiment in Europe's largest economy is due a day later.

Last week, the monthly German ZEW poll showed investor and analyst sentiment falling for the fourth month in a row in April due to the crisis in Ukraine, and another set of subdued economic data could add to pressure on the ECB to ease.

"Euro/dollar is likely to trade with a weaker bias this week given the German IFO and Draghi's speech coming up," said Yujiro Goto, currency analyst at Nomura. "Any downside will be limited though, as investors will await the inflation data due next week."

Very weak inflation in the euro zone, due partly to the strong exchange rate, has raised pressure on the ECB to further loosen monetary policy to stimulate growth.

In the past few weeks Draghi has brought the currency into focus and warned that any further strengthening could lead the euro zone's central bank to use unconventional tools such as asset purchases.

On the other hand, analysts said the dollar was starting to look attractive on the back of improving U.S. data and earnings.

"Better-than-expected company earnings could also encourage renewed inflows into the U.S. stock markets and underpin the dollar," said Citi analyst Valentin Marinov.

The dollar was steady at 102.575 yen, after rising as high as 102.73 yen, its highest since April 8. The yen suffered a mild setback on Monday after data showed Japan's export growth slowed to its weakest in a year, adding pressure on policy makers to inject more stimulus.

WEAK CHINESE YUAN

China's weakening currency was a focus after the People's Bank of China set a lower midpoint of the band within which its currency is allowed to trade.

The offshore yuan hit a fresh 14-month low of 6.2335 to the dollar on worries over a slowing Chinese economy and following Beijing's clampdown on one-direction bets on the yuan's gains since February.

So far there has been limited spillover into G10 currencies from the weaker yuan, but any pick-up in volatility could see investors prefer safe-haven and liquid currencies. The Chinese currency has lost around 2.8 percent against the dollar since the start of the year.

Meanwhile, the New Zealand dollar rose 0.3 percent to $0.8592 as investors gear up for the Reserve Bank of New Zealand to hike interest rates for a second time this year. (Editing by Mark Trevelyan)

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