December 2, 2011 / 11:36 AM / 6 years ago

FOREX-Euro supported on speculation of solid US jobs data

5 Min Read

* Euro hovers near session high vs dollar ahead of US payrolls

* Currencies in tight range, traders wary of big bets before data

* EU summit next week awaited for signs of progress on debt crisis

By Naomi Tajitsu

LONDON, Dec 2 (Reuters) - The euro held on to recent gains on Friday, supported by expectations that U.S. jobs data would show the economy slowly recovering, but it struggled to extend its rally in the absence of a comprehensive solution to the euro zone debt crisis.

Trading ranges were tight, as few investors were willing to buy the single currency aggressively given that it has already rallied more than 1 percent this week even as it remains vulnerable to the region's debt problems.

The non-farm payrolls report due at 1330 GMT is expected to show an increase of 122,000 jobs and a steady unemployment rate of 9.0 percent.

A positive surprise would underpin a recent string of solid U.S. data and bolster risk sentiment, which might prompt some selling in the dollar. A weaker-than-expected outcome may push investors to take more profits on recent euro gains.

Johan Javeus, chief strategist at SEB in Stockholm, said he expected the data would confirm the U.S. economy is faring better than it was in the first half of the year, although it would not show a very strong recovery trajectory.

"It should confirm what we've seen in other data, that things are not as bad as people thought a few months ago. In that sense I don't expect a really big reaction from this number should it come in line with expectations or slightly better," he said.

"In the end, focus is on what could happen with the political process in Europe and that will take precedent."

But with investors sidelined before the jobs report, market participants showed little reaction to a speech by German Chancellor Angela Merkel, who told parliament the euro zone debt crisis could not be solved in one fell swoop and urged tighter fiscal integration.

French and German leaders are meeting next Monday to outline joint proposals to put to a Dec. 9 EU summit, seen as yet another make-or-break meeting for the 12-year-old currency bloc.

The euro traded 0.1 percent higher on the day at $1.3480. It hovered near a session high at $1.3492 but failed to rise further due to selling by an Asian sovereign name, along with a semi-official European name, according to traders.

More offers were lurking near $1.3500, where large options were due to expire later in the day.

Other currencies perceived to be higher risk, including the Australian and New Zealand dollars, also edged up against a slightly softer dollar, which slipped 0.1 percent versus a currency basket to 78.235.

A 1.3 percent rise in European share prices suggested an ongoing improvement in risk appetite this week, which has prompted investors to sell the safe-haven U.S. currency.

Against the yen, the dollar edged up 0.2 percent to 77.80 yen.

Eu Summit Awaited

The euro has held gains after rallying earlier in the week, when major central banks around the world took coordinated measures to increase dollar liquidity to prevent a liquidity crunch in markets.

Analysts said this had provided a stop-gap measure to stabilise markets for now, while adding that investors had big expectations for the EU summit next week.

Morgan Stanley said it had used the euro's gains this week to establish a renewed bearish position on the single currency as it stuck to its view of more weakness in the currency in the mid-term.

"We continue to look for the market to be disappointed by the European Summit," its analysts said in a note, adding that they expected the euro to also underperform commodity currencies, particularly the Canadian and Australian dollars.

The European Central Bank hinted on Thursday it was ready to move more aggressively to tackle the crisis if politicians agree on much tighter budget controls in the euro zone, though it stopped short of detailing what exact measures it would take.

Still, there is no agreement among EU policymakers regarding how such controls could be implemented and many other problems, including securing resources to leverage the euro zone's bailout fund, linger unresolved. Analysts believe this will keep the euro on the back foot.

Economists expect the ECB to help banks and an economy on the verge of recession by cutting interest rates next week and announcing longer-term cheap liquidity tenders with easier collateral rules. Markets are pricing in a 25 basis point cut to 1.0 percent at the ECB's Dec. 8. policy meeting.

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