FOREX-Euro slips before ECB policy decision, Swedish crown gains

Thu Sep 4, 2014 4:31am EDT

Related Topics

* Euro slips as markets await ECB policy action

* Uncertainty over more action from ECB keeping euro bears wary

* BOJ's Kuroda says dollar strength wont hurt Japanese economy (Updates levels, adds comments)

By Anirban Nag

LONDON, Sept 4 (Reuters) - The euro slipped against the dollar on Thursday, hovering near one-year lows hit earlier this week on expectations that the European Central Bank will flag the possibility of more monetary stimulus.

Hopes of a peaceful resolution to the Russian-Ukraine conflict had shored up the common currency, only for Ukraine's prime minister to dismiss the proposal outlined by President Vladimir Putin.

The Swedish crown rose against the euro after the Riksbank kept interest rates unchanged as expected and did not push back the timing of its first rate hike as some in the market had anticipated.

Overall, the focus was on the euro before the ECB rate decision at 1145 GMT and President Mario Draghi's press conference 45 minutes later. The euro has already fallen a long way, dropping from a high of $1.3701 on July 1 to $1.3110 on Tuesday. It last fetched $1.3138, down 0.1 percent.

"The euro's downtrend is intact," said Niels Christensen, FX strategist at Nordea.

"But given a lot of the dovishness from the ECB has already been priced in there is a risk of a bounce if the ECB does not live up to expectations. Nevertheless, investors will look at upticks to initiate fresh short positions."

Traders said some 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.

The euro could bounce to as high as around $1.3250 if the ECB holds off from any more 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.

BOJ AND RIKSBANK MEET

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.

The euro's weakness saw the dollar index climb to 82.924 , not far from Wednesday's 14-month peak of 83.058.

The dollar was firmer against the yen, hitting a day's high of 105.02 yen after Bank of Japan Governor Haruhiko Kuroda said a stronger dollar would not hurt the Japanese economy.

Earlier, the BoJ kept policy unchanged as widely expected, and retained its upbeat view on the economy.

In Europe, the Swedish crown rose to a day's high against the euro after the Riksbank kept interest rates unchanged at 0.25 percent. It also stuck to its previous forecast that it would start to tighten policy at the end of next year.

In a Reuters poll, the majority also expected no change in the rate path, although some had said there was a chance the Riksbank would push back the timing of its first rate increase.

The euro fell to 9.1850 crowns after the announcement from around 9.2160 crowns, leaving it 0.2 percent lower on the day.

"It is a relief that the Riksbank was not as dovish as some had expected, especially given data of late has been pretty mixed," said Nordea's Christensen. (additional reporting by Masayuki Kitano; Editing by Hugh Lawson)

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