FOREX-Euro stabilises but still in the doldrums on ECB threat

Sun May 11, 2014 10:50pm EDT

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* Euro steady after big falls in last two sessions

* Prospect of ECB policy action may keep currency pinned down (Updates levels, adds comments)

By Ian Chua and Masayuki Kitano

SYDNEY/SINGAPORE, May 12 (Reuters) - The euro started the week on a steadier footing after two straight sessions of steep losses, but should stay under pressure amid the persistent threat of policy action from the European Central Bank.

The common currency, which plumbed a one-month trough of $1.3745 on Friday, last held steady on the day at $1.3754.

The euro has shed roughly 1.7 percent since hitting a 2-1/2-year high of $1.3995 on Thursday, having come under pressure after ECB President Mario Draghi said the bank was ready to take action next month should updated inflation forecasts merit it.

Against the yen, the euro edged up 0.1 percent to 140.24 yen , not far from a two-month trough of 139.88 set on Friday.

With its decline since Thursday, the euro has retreated toward the middle of its range so far this year. Possible support lies at that midpoint of its 2014 range near $1.3735, and the euro's 100-day moving average at about $1.3740.

"It remains to be seen whether this will prove to be the start of a full-blown (euro) downtrend, or ends up being just a corrective move," said a trader for a Japanese bank in Singapore.

"But I don't get the sense that it's over," the trader said. The euro now looks more sensitive to negative factors and could come under pressure versus the dollar if U.S. economic indicators come in strong, he added.

Some traders said the drop in the euro may be done for now as investors wait for fresh reasons to sell the currency. They will be paying close attention to a number of ECB speakers this week including Vice-President Vitor Constancio.

"The market will seek confirmation of the ECB's willingness to act," analysts at Barclays Capital wrote in a note to clients.

Investors will also be keeping an eye on developments in Ukraine amid fears the country is sliding into civil war. Pro-Moscow rebels on Sunday declared a resounding victory in a referendum on self-rule for eastern Ukraine.

With the euro looking shaky, the dollar held steady against a basket of major currencies at 79.894, having staged a dramatic turnaround from a 20-month trough of 78.906 plumbed on Thursday.

The greenback inched up 0.1 percent versus the yen to about 101.97 yen, staying above a three-week low of 101.43 yen set last Wednesday.

The Australian dollar held steady at $0.9359, still within striking distance of a near one-month peak of $0.9395 set on Thursday. (Additional reporting by Reuters FX analyst Rick Lloyd in Singapore; Editing by Jacqueline Wong)

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