CORRECTED-FOREX-Aussie moves higher on capex numbers, euro steadies

Thu May 29, 2014 4:59am EDT

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(Corrects name of bank that analyst works for in paragraph 5)

* Aussie buoyed by solid outlook for local business investment

* Dollar index hovers near previous day's 2-month high

* Euro firmer but still mired near a 3-month trough

* Sterling also steadies around $1.67 after slide

By Patrick Graham

LONDON, May 29 (Reuters) - The Australian dollar jumped more than half a percent on Thursday as investors considered whether there was further to run in this week's major moves on currency markets - a rally for the dollar and retreats for the euro and sterling.

A holiday in much of Europe thinned out trading and analysts said action might be limited until the United States came on line later, with a second estimate of U.S. second quarter growth the day's data highpoint.

The euro has fallen to a three-month low this week as expectations solidified for a multi-pronged attack on monetary policy by the European Central Bank next week. It was holding steady just above support at $1.3583 on Thursday.

The Aussie was driven higher by data on business investment which showed planned spending for 2014/15 jumped to A$137 billion, from an earlier estimate of A$125 billion, overshadowing a dip in such spending in the first quarter.

"The interesting thing about the Australian economy is that it is showing some signs of divergence away from China," said Christian Lawrence, a currency strategist at Rabobank in London.

"There is an increasing feeling that Australia can weather the slowdown in China better than people previously thought."

In early trading in Europe, the Aussie was up 0.54 percent at $0.9286. The currency has held between longer-term support around $0.92 and its 21-day moving average at $0.93 for the past two weeks. Dealers said it may struggle to break out of that range in the near future.

Both the pound and the euro recovered a foothold after falling through barriers respectively at $1.36 and $1.67 in the previous session.

For sterling, one of the past year's big winners, the fall this week has led some to wonder whether its rally against the dollar has peaked. Thursday's pause underlined the fact that the jury, for many, is still out.

Citibank analyst Josh O'Byrne said the pound might in particular have room to recover against the euro.

"The pound selloff could be driven by temporary factors like month-end corporate hedging as well as unwinding of bets on favourable M&A flows," he said.

"While some cautiousness maybe warranted ahead of the mortgage lending data next Monday, we believe that (the) recent move higher in EURGBP could offer an interesting selling opportunity ahead of the ECB meeting next week."

The pound traded roughly flat at $1.6703 and just 0.04 percent higher at 81.36 pence per euro.

DOLLAR SOLID

The dollar hovered near a two-month high against a basket of major currencies, also taking a pause after rallying on the back of the slide for sterling, the euro and a number of developing world currencies.

The dollar index eased less than 0.1 percent to 80.525, within sight of Wednesday's high of 80.581, its best since early April.

Expectations of policy action from the ECB have been mounting, a key reason for the recent underperformance in the euro. A Reuters poll of 48 economists showed a clear majority expect the ECB to cut its deposit rate into negative territory next week, a view reinforced for many in the market by policymakers' comments this week.

Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore, said the euro would stay on the defensive going into the ECB meeting on June 5.

Still, the recent decline in U.S. bond yields may help limit the scope of the euro's declines against the dollar, he added.

"Given how much U.S. yields have fallen, I doubt that you can chase the dollar higher that aggressively although there may be some short-covering," Okagawa said. (Additional reporting by Ian Chua in Sydney and Masayuki Kitano in Singapore; Editing by John Stonestreet)

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A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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