FOREX-Euro stabilizes on Ukraine ceasefire talk before ECB

Wed Sep 3, 2014 3:39pm EDT

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By Richard Leong

NEW YORK, Sept 3 (Reuters) - The euro steadied against most major currencies on Wednesday on speculation of a possible ceasefire in eastern Ukraine, offering some relief to the euro zone which has absorbed the brunt of the economic impact from the conflict.

The common currency rose from its one-year low versus the dollar after Ukraine's President Petro Poroshenko said an agreement was reached with his Russian counterpart Vladimir Putin for a "permanent ceasefire" in eastern Ukraine's Donbass region.

The initial optimism faded shortly after the Kremlin said a ceasefire had not been agreed between Moscow and Kiev. The two sides could still reach a deal at planned talks in Minsk on Friday.

The mixed messages caused some confusion, but most investors were relieved by signs both countries were moving towards peace.

"Still the gist of the headlines are a positive one," said Sireen Harajli, currency strategist at Mizuho Corporate Bank in New York.

The euro last traded on the EBS platform up 0.07 percent at $1.3142, recovering from a one-year low of $1.3110 struck on Tuesday, but it dipped 0.16 percent at 137.79 yen after touching an eight-week high earlier at 138.28 yen.

The dollar weakened against the Russian rouble on the ceasefire talk. The greenback fell 1.6 percent to 36.844 roubles after hitting a record high of 37.515 roubles on Monday.

The conflict in Ukraine and related sanctions imposed by western countries on Russia have taken its toll on the euro zone which analysts reckon will need more stimulus from the European Central Bank.

While the ECB is unlikely to take action on Thursday, the threat of falling prices, along with uncertainty to the recovery from the Russia/Ukraine conflict, is likely to see President Mario Draghi flag the prospects of more easing in coming months.

"Conditions in the euro zone continue to weaken. It's a matter of time (before) the ECB has to act aggressively," said Mizuho's Harajli.

The euro's recovery saw the dollar index edge down 0.14 percent to 82.879, which was not far below a 14-month high of 83.058 set earlier. The dollar has made an impressive start in September on strong domestic economic data .

The U.S. Federal Reserve's Beige Book on regional economic activities released on Wednesday showed ongoing expansion across the United States in recent weeks, but the pace of growth did not accelerate, supporting traders' expectations the Fed would leave interest rates near zero at least into the middle of 2015.

"The Fed's outlook is largely intact. There are no worries for an early Fed exit," said Sean Incremona, an analyst at 4Cast Ltd. in New York.

Meanwhile, the yen was supported by expectations that the Bank of Japan, which began a two-day policy meeting, may sit tight and reiterate its view that the economy is recovering moderately.

The yen would also remain under pressure on bets that Japan's behemoth Government Pension Investment Fund (GPIF) would decide in the coming weeks to put more money into riskier assets including stocks and foreign bonds, which could increase demand for foreign currencies.

Against the yen, the dollar declined 0.23 percent at 104.83 yen, below an eight-month high of 105.31 yen on the EBS system. A break above 105.45 yen would take the greenback to a high not seen since October 2008. (Additional reporting by Anirban Nag in London; Editing by Toby Chopra and Bernadette Baum and Chizu Nomiyama)

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