* Fed extends Twist, leaves easing options open
* Euro drops to session low after German PMI
* Aussie dollar extends losses after weak China report
By Anirban Nag
LONDON, June 21 The dollar rose against the euro
and growth-linked currencies on Thursday after the U.S. Federal
Reserve disappointed investors who had expected it to opt for
more aggressive easing - a move that would have boosted appetite
for riskier currencies.
The euro came under fresh pressure after data showed
Germany's private sector shrank in June for the second month
running, with manufacturing activity hitting a three-year low.
This suggested Europe's largest economy may contract in the
second quarter as the euro zone debt crisis intensified, and
offset data from France which showed a slowdown in business
activity there had eased.
Overall, the data made grim reading and kept alive
expectations the European Central Bank will cut interest rates,
offering investors a fresh excuse to sell the euro.
"The market has got used to terrible numbers from the euro
zone. The focus is now on the Spanish auction, but the medium
term outlook for the euro remains weak," said Geoff Kendrick,
currency strategist at Nomura.
The euro dropped 0.4 percent to $1.2650, having hit a
high of $1.2744 on Wednesday. Bids from sovereign investors and
macro funds were cited below $1.2620. Offers were reported above
$1.2700 and stop-loss orders above $1.2720, traders said.
The dollar regained lost ground after the Fed stopped short
of launching a more aggressive programme of buying bonds
outright, or QE3, which some in the market had expected.
The dollar index, a measure of the greenback's
performance against a basket of currencies, rose 0.13 percent to
81.717. The dollar rose 0.2 percent to 79.63 yen, getting
some support after U.S. Treasury yields edged up on Wednesday.
The Fed expanded its "Operation Twist", under which it sells
short-term securities to buy longer-term ones to keep long-term
borrowing costs down, by $267 billion. The programme, which was
due to expire this month, will run until the end of the year.
Analysts said the dollar's outlook was clouded, with more
players likely to position for fresh Fed stimulus after central
bank downgraded its U.S. growth forecast.
SPAIN IN FOCUS
Many analysts said the Fed was probably saving ammunition
given the risk the euro zone crisis could deteriorate in coming
weeks as borrowing costs in peripheral countries remain high.
Spain's borrowing costs are expected to hit new highs at a
debt auction on Thursday, a few hours before it sheds light on
the state of its banks and possibly makes a formal request for
funds to bail out the sector.
The single currency got a lift on Wednesday after German
Chancellor Angela Merkel said both of Europe's bailout
programmes included mechanisms for buying state debt on the
secondary market. But she stressed this was a "purely
theoretical" question and was not being
Meanwhile, growth-linked currencies came under pressure,
digesting the Fed decision and weak Chinese data. The Australian
dollar fell 0.5 percent to $1.0141, retreating from a
seven-week high of $1.0225 hit on Wednesday.
The Aussie dollar hit an intraday low after a private-sector
survey showed China's factory sector contracted for an eighth
successive month in June, with export orders at their weakest
since early 2009.
"The indications from China at least, are that they are
taking the slowdown a bit more seriously," said Todd Elmer,
currency strategist at Citi in Singapore.
If the weakening in Chinese data is sustained, market
players may start to question the effectiveness of Chinese
policy steps to support its economy, Elmer said.