* Euro gains vs dollar ahead of ECB meeting on Thursday
* Uncertainty about U.S. debt ceiling should favor dollar
* Dollar/yen retreats from Friday's high after swift rally
* Could fall further if BOJ does not meet expectations
By Julie Haviv
NEW YORK, Jan 7 The euro rose for a second
straight session against the dollar on Monday, buoyed by
expectations that the European Central Bank will refrain from
cutting interest rates at its meeting later this week.
The U.S. currency, meanwhile, retreated from a 2-1/2 year
high against the Japanese yen as robust appreciation over the
past month had investors opting to book profits despite
forecasts of further Bank of Japan stimulus later in the month.
With little U.S. economic data being reported this week
currency trading will most likely be driven by the ECB's meeting
on Thursday, comments from an array of Federal Reserve speakers
as well as sentiment in other asset classes, such as stocks.
"Euro/dollar is being driven by expectations that the Fed
will maintain an easy monetary policy stance, which drives the
currency pair higher," said Sebastien Galy, FX strategist at
Societe Generale in New York.
"Bouts of risk aversion are more likely to hit yen crosses
via sentiment, given how much they have moved in the past
weeks," he said.
Minutes from December's Fed meeting released last week
raised expectations that the central bank could end its
bond-buying program, called quantitative easing, this year, but
a lackluster non-farm payrolls report last Friday has some
expecting the U.S. central to maintain the status quo.
The euro last traded at $1.3108, up 0.3 percent on
the day and well above last week's three-week low of $1.2997.
Volatile trade defined the day's activity, with the session low
at $1.3016 and the peak at $1.3119.
The euro's move higher also gained strength from headlines
indicating that Silvio Berlusconi will not stand as candidate
for prime minister in next month's Italian election under the
terms of a coalition deal with the Northern League.
George Davis, chief technical analyst at RBC Capital Markets
in Toronto, said euro/dollar last Thursday posted a bearish
trend reversal below the $1.3100.
"I'm not sure if this is due to the debt ceiling debate at
this juncture, as many seem to think that this will heat up and
get messy in February and March," he said. "However, if this is
the case and it upsets the equity markets, then the resulting
'risk off' environment would be one that is positive for the
"As such, I would keep an eye on this theme over the next
2-4 weeks," he said.
Trade should be increasingly volatile in the weeks ahead,
with heated U.S. political debates on raising the government's
borrowing limit, or debt ceiling, and sequestered spending cuts
that are to take place in early March likely to benefit the
dollar due to its status as a safe haven.
Analysts cautioned the euro was more likely to remain under
pressure as markets refocus on the euro zone's bleak economic
landscape and ECB meetings. Any indication of monetary stimulus
or comments on economic weakness could push it lower.
"While the Bank indicated its willingness to lower interest
rates this year, we do not anticipate a rate cut at this week's
meeting as price pressures have increased with core inflation
picking up slightly," said Eric Viloria, senior currency
strategist at Forex.com. "As economic activity continues to
contract, we think that the ECB will eventually lower rates in
the coming months."
Investors will also look at Spanish and Italian bond
auctions toward the end of the week. If the sales receive solid
demand, the euro could gain against the dollar.
Expectations of aggressive monetary easing by the Bank of
Japan has caused the dollar to rally more than 8 percent versus
the yen since early December. The BOJ meets on Jan. 21-22.
Audrey Childe-Freeman, head of foreign exchange strategy at
BMO Capital Markets in London, said there was a risk the BOJ's
actions might fall short of market forecasts, leading the dollar
"There is a risk that markets got a little bit carried away
and that we don't see as much as we were hoping for (from the
BOJ) and we see a pullback in dollar/yen."
Traders also said the yen found some support on worries that
Japanese mobile operator Softbank Corp's deal to buy 70
percent of U.S. carrier Sprint Nextel Corp could run into
The euro fell 0.1 percent to 115.12 yen, well
below last week's 18-month high of 115.99 yen.
Against the yen, the dollar was down 0.4 percent at 87.78
yen, off Friday's peak of 88.40 yen, which was its
strongest since July 2010, according to Reuters data.