REFILE-FOREX-Euro hits fresh one-year low, hamstrung by Ukraine turmoil

Mon Sep 1, 2014 12:34am EDT

Related Topics

(Corrects typographical error in headline)

* Euro dips to fresh one-year low vs USD

* EU threatens Russia with new trade sanctions

* SNB head says bank ready to intervene to defend cap

By Ian Chua and Masayuki Kitano

SYDNEY/SINGAPORE, Sept 1 (Reuters) - The euro hit a fresh one-year low on Monday, as heightened worries about the crisis in Ukraine kept the currency on the defensive ahead of a European Central Bank policy meeting later this week.

The euro fell as far as $1.3119, reaching lows not seen since early September 2013. It last traded at $1.3125, down 0.1 percent on the day.

Ukrainian President Petro Poroshenko warned a "full-scale war" was imminent if Russian troops continued an advance in support of pro-Moscow rebels as Europe and the United States threatened Russia with new sanctions.

Analysts said the risk to euro zone growth posed by the Ukraine conflict and stubbornly low inflation should keep the pressure on the European Central Bank to provide further stimulus at some stage, if not this week.

While the euro could gain on short-covering if the ECB were to stand pat at its policy meeting on Thursday, any respite is likely to be short-lived, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.

Expectations for further ECB monetary stimulus in coming months will likely remain intact and weigh on the euro, he said.

"Germany's economy is starting to show some signs of weakness, and I think it will probably be difficult (for the ECB) to remove its easing bias," Murata said.

The euro started September on a weak note after posting its second straight month of losses versus the greenback in August, when it slid 1.9 percent following a 2.2 percent drop in July.

"It is too early for the ECB to announce new policy measures, given that the two most powerful policies announced in June are not yet deployed," analysts at Barclays said, referring to the ECB's targeted long-term repo operations and asset-backed securities purchases.

"But a minority of market participants expect new policy at this week's meeting. As a result, inaction may be greeted by temporary relief from euro depreciation, but we would see any short-term rallies as a selling opportunity," they wrote in a note to clients.

The euro held steady above a near two-year low versus the Swiss franc after the head of the Swiss National Bank (SNB) said it stood ready to intervene in the currency market to defend its cap on the franc.

The euro last stood at 1.2064 francs, staying above last week's low of 1.2049 on trading platform EBS, its lowest level versus the Swiss franc since late 2012.

The SNB introduced a 1.20 per euro cap in 2011 to prevent the franc's strong appreciation from further hurting the economy, although it has not had to defend the cap for the last two years.

Despite the geopolitical tensions, there was no meaningful safe-haven bid for the yen. That saw the dollar edge up 0.1 percent to about 104.18 yen.

The U.S. Labor Day holiday on Monday could dampen market activity over the course of the day. Moves among major currencies were subdued ahead of policy reviews by central banks in the euro zone, Japan, Britain, Canada and Australia, all of which are coming up later this week.

The Australian dollar inched up 0.1 percent to $0.9341, showing limited reaction to surveys pointing to a slowdown of manufacturing activity in China, a major destination for Australian resource exports.

The final HSBC/Markit Purchasing Managers' Index (PMI) for China slipped to a three-month low in August, while China's official PMI fell from a 27-month high. (Editing by Shri Navaratnam and Eric Meijer)

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