* Markets cautious that euro strength may concern ECB
* Could dip further before ECB decision at 1245 GMT
* Most feel Draghi won't explicitly mention euro moves
* Broader trend for further euro gains intact
By Anooja Debnath
LONDON, Feb 7 The euro rose on Thursday as Asian
sovereign investors and macro funds bought, but most investors
refrained from aggressively adding bets on the currency
strengthening before a European Central Bank meeting.
While the ECB is widely expected to keep interest rates on
hold when it announces its decision at 1245 GMT, investors will
watch for any comments from its President Mario Draghi at his
1330 GMT news conference about how the currency's strength might
affect the fragile euro zone economy.
While the chances of Draghi voicing any concern about the
currency are slim, given the trade-weighted euro
has risen a modest 3 percent since early last month, any hint of
discomfort could drag the currency sharply lower.
On the other hand, if he sounds unconcerned about the euro's
rise and reiterates the G20's commitment to market-determined
exchange rates, the euro is likely to bounce and could retest
"The key question Draghi will be asked is about currency
wars," said Neil Mellor, currency strategist at Bank of New York
"He will likely say currency moves should be set by the
markets, leading most to assume that the ECB is not prepared to
do anything and the euro will probably go a little higher at the
end of the meeting."
The euro was up 0.3 percent at $1.3563. It could
retest yesterday's high of $1.3597 and move towards the
$1.38-$1.40 region over the next few weeks, strategists said.
The euro hit a 15-month high of $1.3711 on Feb. 1.
If Draghi did comment that the higher euro was likely to
hurt the euro zone economy, the currency could make a swift move
down to its Jan. 29 low of around $1.3414 and possibly lower,
The euro was up 0.6 percent at 127.38 yen, not
far from its 34-month high of 127.71 yen hit on Wednesday.
Traders cited stop loss sell orders at 127.50 yen and 127.70-75
yen, which could cap its gains, for now.
The euro has risen more than 2 percent against the greenback
so far this year and over 10 percent versus the yen. This has
triggered strong protests from some European politicians.
But while the French have raised concerns a strong euro
could derail exports and threaten a nascent euro zone recovery
the Germans have said the shared currency is not over-valued.
Draghi sounded optimistic about a euro zone recovery last
month, helping set the stage for a sharp euro rally. But this is
unlikely to be enough to prompt the ECB chief to explicitly talk
about the euro.
"Previous ECB President Jean-Claude Trichet had used the
term "brutal" to describe euro gains," said analysts at Morgan
Stanley in a note. "However, we do not believe that the current
euro rise is yet at the stage where it is impacting the ECB's
monetary stability mandate, requiring verbal intervention."
Other potential risks to the euro would come from any
comments Draghi makes on an Italian banking scandal and the
recent rise in money market interest rates after some banks
repaid loans from the ECB early.
"What Draghi might do is address concerns about declining
liquidity in the euro zone and assure markets there is plenty of
liquidity and it is too soon to tighten monetary conditions,"
said Elisabet Kopelman, FX and FI strategist at SEB.
A Spanish bond auction earlier on Thursday drew healthy
demand but a slight rise yields on the short-dated paper limited
gains in the euro.
The dollar was up 0.3 percent against the yen at 93.87 yen
, putting it on course to test its 33-month peak around
94.075 yen hit on Wednesday. U.S. speculative accounts were
still actively buying the dollar on dips, with stop-loss orders
said to be placed at 93.20 yen and just below 93 yen.
Sterling rose on Thursday after incoming Bank of England
governor Mark Carney showed little bias towards immediate looser
monetary policy, wrong footing many investors who had expected
him to be more dovish.
The pound rose 0.3 percent to $1.5708 as investors
who had bet on hints of more aggressive easing measures from
Carney, who takes the helm in July, covered their short
Traders cited buying by an Asian central bank, before
sterling ran into offers around the $1.5775-90.