* Euro zone PMIs, tighter money markets, lift euro
* Markets wait to see if Fed will reduce stimulus this week
* Yen bounces back from five-year low vs dollar before Fed
By Gertrude Chavez-Dreyfuss
NEW YORK, Dec 16 The euro edged higher against
the dollar on Monday after two days of losses, lifted by euro
zone data showing business activity picked up, while uncertainty
over the Federal Reserve's economic stimulus program kept
investors wary of the greenback.
The Fed goes into a two-day meeting starting on Tuesday and
market participants have started to price in the possibility
that it will opt for a small reduction in its bond purchases.
That resulted in a stronger dollar trend last week, but
Vassili Serebriakov, currency strategist at BNP Paribas in New
York, said much of the dollar-buying has been done.
"There's no reason to buy the dollar ahead of the Fed
decision and so this is just position adjustment," he said,
adding that BNP expects the Fed to start scaling back its asset
purchases in March.
"In the meantime, we continue to scratch our heads about the
euro's strength. I guess the euro is being lifted by year-end
factors - liquidity has tightened in the euro zone with European
banks paying back loans owed to the European Central Bank. That
has pushed up short-term interest rates."
The euro rose to just shy of $1.38 after a report on
Monday showed German manufacturing activity and the Flash
Eurozone Composite Purchasing Managers' Index both beat
forecasts in December. It was last at $1.3766,
up 0.2 percent on the day.
The single currency had earlier dipped to around $1.3745
after separate data showed French private-sector activity
It trimmed some of its gains after ECB President Mario
Draghi, speaking before the European Parliament on Monday,
highlighted the euro zone economy's downside risk, affirming
that interest rates in the region will stay low, if not lower,
for longer. The euro was last up 0.1 percent at
The dollar index, meanwhile, fell 0.2 percent to
80.072, consistent with lower U.S. Treasury bond yields
Market participants, in general, do not expect the Fed's
rate-setting committee to make any major policy change when it
meets on Tuesday and Wednesday. But most recent
U.S. data suggest the Fed will begin to wind down its
bond-buying program sooner rather than later.
Jens Nordvig, head of G10 FX strategy at Nomura Securities
in New York, said that if the Fed decides to taper this week,
the impact on the market will not be as dramatic as in May and
June, when investors started pricing in a reduction in the Fed's
"Much will depend on whether tapering is combined with
enhanced forward guidance," said Nordvig. "Bottomline, risk
assets may trade fairly well, despite taper, and in FX we would
look to buy dollar/yen again, ideally on a dip."
Highlighting nervousness in the market, euro/dollar
one-month implied volatility, a gauge of how choppy a
currency pair is likely to be, rose to its highest in five weeks
at 7.11 percent.
The euro has risen in recent weeks, tracking higher euro
zone money-market rates. As euro zone banks repay cheap loans to
the European Central Bank, the ECB's balance sheet should
shrink, putting further upward pressure on rates. In contrast,
the Fed, for now, and the Bank of Japan are printing vast sums,
weakening the dollar and the yen.
The yen rose as investors bought the safe-haven currency
after tepid Chinese manufacturing data fueled concern about
recovery in the world's second-largest economy. An uptick in
Japanese business sentiment supported the yen at the margins,
but most analysts said the gains would probably not last.
"The central bank is printing money and the majority of
analysts even expect it to increase the volume of bond purchases
in 2014," Lutz Karpowitz, currency strategist at Commerzbank,
wrote. "The yen has everything required to come under further
pressure, and Tokyo also welcomes a weak yen."
The dollar fell 0.2 percent to 102.98 yen.
The euro was little changed at 141.73 yen, off a
five-year high of 142.82 yen hit last week.
Data from a U.S. financial watchdog showed speculators' net
yen short positions were near six-year highs last week.