* Markets cautious that euro strength may concern ECB
* Could dip further before ECB meeting on Thursday
* Dollar hits May 2010 high vs yen but ends down
* Yen remains vulnerable to more weakness
By Julie Haviv
NEW YORK, Feb 6 The euro slid against the dollar
and yen on Wednesday as investors booked profits in the
aftermath of weeks of sharp gains the day before a European
Central Bank meeting that has the potential to sway the
direction of the currency.
The euro will likely fall if ECB President Mario Draghi,
during a press conference following the central bank's monthly
policy-setting meeting on Thursday, voices concerns about the
recent swift and sharp rise of the currency.
If Draghi comments on the potentially harmful impact of a
stronger euro, it could be seen by the market as a kind of
verbal intervention, but most believe he will avoid commenting
on the currency.
Draghi is expected to recognize an improvement in the euro
zone outlook and in market sentiment while acknowledging the
region still faces many hurdles.
Supportive comments from Draghi last month helped set the
stage for a sharp euro rally this year, lifting it to a
14-month high against the dollar, a 34-month peak against the
yen and 15-month top on sterling.
"We expected euro/dollar to remain in tight ranges this
whole week ahead of the ECB, which is what we have seen," said
John Doyle, foreign exchange strategist at Tempus Consulting in
Thursday "could be eventful, especially if the ECB hints at
a future interest rate cut in the coming months," he said.
Political uncertainty in Spain and Italy has given the euro
a slightly bearish tone over the past few days, but the euro
zone's economy is showing signs of improvement, which diminishes
chances of another ECB rate cut.
The ECB is expected to leave interest rates on hold.
"Like most, we do not expect the central bank to change
their current policy tomorrow," he said.
The euro last traded at $1.3524, down 0.4 percent on
the day and below last week's peak of $1.3711, its highest since
French President Francois Hollande called on Tuesday for a
target exchange rate to protect the currency from "irrational
movements", although the idea ran into immediate opposition from
The euro pared losses on comments by German government
spokesman Steffen Seibert, who said the euro was not over-valued
and that long-term competitiveness could not be achieved via
"We bought the euro on a break of $1.3500, but have since
sold our position because we believe that at $1.3700-$1.400 it
will bring out howls of protest from euro zone policymakers,"
said Boris Schlossberg, managing director at BK Asset Management
in New York.
Schlossberg, who holds a neutral position on the euro, said
the key factor for euro/dollar strength will hinge on Germany.
"Only if and when they start to make noises about a strong
euro will we see a serious correction," he said.
Against the yen the euro was last down 0.6 percent at
126.42 yen, off a 34-month peak of 127.69 touched in
Asian trade, with the yen remaining under selling pressure on
expectations of aggressive monetary easing in Japan.
"For now we remain in consolidation phase and the market
wants to see euro zone economic fundamentals improve now that
finances have stabilized," he said.
The euro is up nearly 2.5 percent against the dollar this
The dollar was last at 93.48 yen, down 0.1 percent on
the day, according to Reuters data. The dollar reached a peak of
94.06 yen in Asian trade, its highest since May 2010.
News on Tuesday that current Bank of Japan Governor Masaaki
Shirakawa will step down three weeks earlier than planned
spurred the latest bout of yen selling.
"The yen seems to be a one way train," said Tempus' Doyle.
"We try to remind our clients how overvalued the yen has been
for the past few years and was due for a major revaluation."
"Trying to pick the yen's bottom has been a dangerous
endeavor, but I am staying short yen and will look to take
profit again above 94," he said.
Japanese Prime Minister Shinzo Abe, who has put the BOJ
under pressure to do more to spur the economy, has made it clear
he wants a governor who will be bold in easing monetary policy.
The dollar is up about 7.8 percent against the yen this
year, according to Reuters data.