FOREX-Harried euro gets respite ahead of inflation test

Thu Aug 28, 2014 12:03am EDT

Related Topics

* Euro pops up from a near one-year low against USD

* Market reassesses dovish ECB expectations for next week

* Upbeat Australian business investment data supports Aussie (Updates prices, adds comments)

By Ian Chua and Masayuki Kitano

SYDNEY/SINGAPORE, Aug 28 (Reuters) - The euro inched higher on Thursday and held above a one-year low versus the dollar, getting some respite as feverish speculation of an imminent round of easing by the European Central Bank cooled.

Sources told Reuters on Wednesday that the ECB is unlikely to take new policy action next week unless inflation figures on Friday show the euro zone sinking significantly towards deflation.

That prompted investors to trim very bearish positions in the euro. The common currency rose 0.2 percent to $1.3214 , up from Wednesday's low near $1.3152, which was the euro's weakest level in almost a year.

The respite for the euro may not last very long, however, said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore.

"The overall bias remains lower in the euro...the only question within that is how far and how fast," Henderson said, adding that euro zone inflation data on Friday would be a focal point.

"Our base case is still that the ECB is likely to do QE some time over the next four to six months," he said, referring to the possibility of an asset-buying programme of some form by the ECB, or quantitative easing.

Preliminary German inflation data due later Thursday will be closely watched to gauge how soft the euro zone numbers might turn out.

Against the yen, the euro rose 0.1 percent to 137.10 , up from Wednesday's two-week trough of 136.75. Against the Swiss franc, the euro held steady at 1.2072 , up from Wednesday's low of 1.2060, its lowest level since late 2012.

"The euro is going through a moderate corrective bounce as markets reassess their dovish ECB expectations for next week's policy meeting," analysts at BNP Paribas wrote in a note to clients.

They said "investors should position for further euro weakness" believing there are other drivers in place including an escalating trade war with Russia and a shift in the Federal Reserve's policy stance that should weigh on the currency.

The rebound in the common currency knocked the dollar index off a 13-month peak. It last stood at 82.340, down from the high set on Wednesday at 82.727.

Against the yen, the dollar eased 0.1 percent to about 103.76 yen, having retreated from a seven-month high of 104.49 yen set on Monday.

The Australian dollar fared reasonably well and touched a three-week high of $0.9373 after data showed a better-than-expected outlook for Australian business investment. It last stood at $0.9359, up 0.2 percent on the day.

Later on Thursday, an update to second quarter U.S. growth data should also garner some attention, although the report should affirm the economy had rebounded sharply from the first quarter. (Editing by Eric Meijer & Shri Navaratnam)

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