April 24, 2013 / 3:52 PM / 4 years ago

FOREX-Euro steady vs dollar but bets rise for an ECB rate cut

* German business morale falls short of expectations
    * Euro steady vs dollar after hitting three-week low
    * Dollar falls vs yen after U.S. durable goods data
    * Dollar still hovering within sight of 100 yen mark

    By Julie Haviv
    NEW YORK, April 24 (Reuters) - The euro traded flat against
the dollar after hitting a near three-week low on Wednesday as
hopes that Italy can resolve its political gridlock were offset
by weak German data that fanned speculation the European Central
Bank will cut rates soon.
    The euro had fallen after a survey by Germany's Ifo
think-tank showed business sentiment dropped for a second month
in April, fuelling concerns about the health of the euro zone's
largest economy. 
    The euro was already vulnerable after German PMI data on
Tuesday showed business activity dropping sharply in April.
    "The release of softer IFO data from Germany drove a brief
decline in the euro, albeit one that was quickly retraced," said
Eric Theoret, forex strategist at Scotiabank in Toronto.
    The euro dropped to $1.2954, its lowest since April 5,
before paring losses to last trade at $1.2994, flat on
the day. An Asian central bank and a supra-national investor
were cited as buyers earlier in the global session.         
    "With regards to the outlook for the ECB, focus has turned
to next Thursday's meeting, with rising expectations for an
easing in monetary policy," Theoret said. 
    The European Central Bank currently has rates at a record
low 0.75 percent.
    Recent comments by ECB policymakers have stressed falling
inflation and poor euro zone growth prospects, suggesting
policymakers are leaning towards a further cut at their next
meeting on May 2. 
    The ECB has room to act on interest rates if economic
conditions remain weak, ECB Vice President Vitor Constancio said
on Wednesday. 
    With interest rates in the United States and Japan at or
near zero, an ECB rate cut would diminish the euro's advantage.
The ECB, however, has refrained from pumping massive amounts of
money into the euro zone through asset purchases, unlike the
Federal Reserve or the Bank of Japan's actions.
    Nevertheless, investors may view an ECB rate cut as positive
for the euro because the central bank is taking action to
stimulate economic growth. 
    Traders said the euro drew some support from reports that
Italian President Giorgio Napolitano had called on Enrico Letta,
deputy head of the centre-left Democratic Party, to form a new
coalition government. 
    The formation of a government in the euro zone's
third-largest economy after months of uncertainty would offer
relief to investors looking to buy assets in the region.
    "But the risk-reward in the euro is to sell it into any rise
to $1.3100/50," said Mankash Jain, head of FX and Investment
Management at hedge fund Solo Capital in London. "The data from
Germany has been weak, the Ifo was weak and if the ECB were to
cut rates next week, the euro would fall."
    The dollar fell against the yen after data showed orders for
long-lasting U.S. manufactured goods recorded their biggest drop
in seven months in March and a gauge of planned business
spending rose modestly, adding to signs of a slowdown in factory
    While the yen remains weighed by the Bank of Japan's
ambitious bond-buying program announced this month, concerns
about global growth have lifted the currency recently.
    The dollar hit a four-year high of 99.94 yen on April 11
after the Bank of Japan unveiled a sweeping monetary stimulus
program which entails buying $1.4 trillion of bonds in less than
two years. 
    The dollar last traded at 99.38 yen, down 0.1 percent
on the day. 
    Many traders are braced for a test of the 100 yen mark in
coming days, although offers were reported around 99.80-85 yen
that could limit the dollar's gains in the short term.    
    The euro last traded at 129.08 yen, down 0.2
percent and well off a more than three-year high of 131.10 yen
hit earlier this month. 
    Meanwhile, despite expectations of a rate cut by the ECB,
the euro rose to a five-week high against the Swiss franc on
renewed speculation that the Swiss National Bank could raise the
floor imposed on the euro/Swiss franc pair to 1.25 francs from
    The euro rose to 1.2319 francs, its highest since
mid-March. It went past a reported options barrier at 1.2300
francs, with traders citing talk of a Swiss bank selling the
franc against the dollar.
    Looking ahead, market participants on Thursday will likely
focus on a weekly Japanese investor flow report. 
    The BoJ's bond-buying plan has caused Japanese government
bond yields to collapse. Many speculate investors in Japan may
eventually park money overseas, where yields are higher, but
data so far has shown that has not been the case.

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