RPT-FOREX-Dollar rally takes a pause, but offers little support to euro

Tue Aug 26, 2014 4:33am EDT

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* Speculation of more ECB action keeps pressure on euro

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By Anirban Nag

LONDON, Aug 26 (Reuters) - The dollar took a breather on Tuesday after recent gains, but that offered little solace to a struggling euro that was pinned down near 19-month lows against the Swiss franc on expectations of a soft inflation reading and more monetary easing.

The euro hit a one-year trough against the dollar earlier in Asian trade as prospects of asset purchases, or quantitative easing, gathered pace.

Data showing German business sentiment sagging for the fourth month running, and the resignation of the French government following a row over fiscal policy, added to the bearish mix for the euro.

The single currency was trading at 1.20775, having fallen to 1.2072 Swiss francs on Monday, its lowest since early January 2013 on trading platform EBS, with the market close to testing the Swiss National Bank's three-year old pledge to cap its currency at 1.20 per euro.

"I haven't heard anything about the SNB changing its commitment to the 1.20 floor and I don't expect it to," said Marshall Gittler, head of currency strategy at IronFX Global.

"That means the risk/reward ratio for long euro/Swiss franc positions is about as good as it gets right now. The rate can go somewhat lower and of course the SNB is not required to notify investors before changing its strategy, but past performance ... does suggest they will keep the rate above 1.20."

Against the dollar, the euro was at $1.3202, having dropped to $1.3178 in Asian trade.

Investors await euro zone inflation data on Friday. Analysts polled by Reuters expect annual inflation to have slowed to 0.3 percent in August from 0.4 percent in July. That is well below the ECB's danger zone of 1.0 percent and its target of just under 2.0 percent.

Late on Friday, in stronger language than he has used in the past, ECB President Mario Draghi said the ECB was prepared to respond with all its "available" tools should inflation drop further.

Those comments have triggered speculation that the ECB may be prepared to ease policy further, driving bond yields to lows.

Kyosuke Suzuki, director of forex at Societe Generale in Tokyo, said the euro was contending with a bullish dollar while facing its own bearish factors.

In contrast to ECB's Draghi, Federal Reserve Chair Janet Yellen on Friday gave a nod to the concerns of some Fed officials about the sustained level of monetary policy stimulus, even as she stressed the need to move cautiously on raising rates.

"Euro/dollar is vulnerable to testing new lows. A downtrend is easily formed given the opposite directions Fed and ECB monetary policies are seemingly headed... political trouble in France, a core eurozone country, is also a bearish factor," Suzuki at Societe Generale added.

The dollar index slipped as investors booked profits after two straight days of gains made after Yellen's comments at Jackson Hole. It still remained close to its September 2013 peak of 82.671. A break there will take it back to highs unseen since July last year.

Against the yen, the dollar dipped 0.2 percent to 103.85 , having peaked at a seven-month high of 104.49 overnight.

Sterling bounced off a five-month low of $1.6501 struck on Monday to trade at $1.6582, slightly higher on the day. It was steady against the euro at 79.62 pence, despite pro-Scotland independence leader winning the referendum debate on Monday. (Additional reporting by Shinichi Saoshiro; Editing by Andrew Heavens)

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