FOREX-Euro holds steady as ECB policy decision looms

Wed Sep 3, 2014 11:47pm EDT

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By Ian Chua and Masayuki Kitano

SYDNEY/SINGAPORE, Sept 4 (Reuters) - The euro held steady versus the dollar on Thursday, having recovered from one-year lows set earlier this week as investors repositioned ahead of the European Central Bank policy review.

News of a ceasefire plan in eastern Ukraine further shored up the common currency, although this is now in doubt after Ukraine's prime minister dismissed the proposal outlined by President Vladimir Putin.

The common currency has already fallen a long way, dropping from a high of $1.3701 on July 1 to $1.3110 on Tuesday. It last fetched $1.3149, steady from late U.S. trade on Wednesday.

Traders said euro bears were just taking a breather due to uncertainty over whether the ECB will actually deliver a fresh round of policy stimulus or simply lay the groundwork to act at a later date.

To be sure, the ECB is under strong pressure to tackle stubbornly low inflation at a time when the conflict in Ukraine threatens to destabilise the region's fragile recovery.

"We expect them to reduce the main refinancing rate by 10bps to 0.05 percent, also reducing the marginal lending and deposit rates by similar amounts, taking the deposit rate down to 0.2 percent," said David de Garis, senior economist at National Australia Bank.

"A failure to cut tonight could jeopardise bank involvement in the first round of TLTROs (bank refinancing loans) as many would wait to bid until December with borrowing rates expected to be lower by then."

The dollar index held steady at 82.858, having slipped off Wednesday's 14-month peak of 83.058 as the selloff in the euro ran out of steam.

The euro could bounce to as high as around $1.3250 later on Thursday if the ECB holds off from any additional monetary easing, said Masafumi Yamamoto, market strategist for Praevidentia Strategy in Tokyo.

"I don't think there is a need to lower interest rates just yet," he said, adding that while inflation in the euro zone has been slowing, the ECB will probably wait to see how the TLTRO plays out. The first TLTRO operation, the ECB's bank funding plan unveiled in June, is set for Sept. 18.

Still, the euro's downtrend since July is likely to remain intact even if the ECB holds off on any additional monetary easing, Yamamoto said. He expects ECB President Mario Draghi will probably point to the possibility of more monetary stimulus in his post-meeting remarks.

Against the yen, the euro held steady near 137.83 yen , having scaled a seven-week peak of 138.28 on Wednesday.

The dollar was flat at 104.85 yen, but below Wednesday's eight-month high of 105.31 yen.

The yen showed limited reaction after the Bank of Japan kept monetary policy unchanged as widely expected, and retained its upbeat view on the economy.

The BOJ voted unanimously to maintain its pledge of increasing base money, or cash and deposits at the central bank, at an annual pace of 60-70 trillion yen ($572-$667 billion) through purchases of government bonds and risky assets. (Editing by Shri Navaratnam)

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