* Euro edges lower vs dollar after Friday's rally
* Fed monetary easing speculation to weigh on dollar
* Investors await Dutch election, German court ruling
By Nia Williams
LONDON, Sept 10 The euro slipped against the
dollar on Monday but was still close to a near four-month high
hit on Friday when disappointing U.S. jobs data fanned
speculation the Federal Reserve may launch more monetary
stimulus this week.
Heightened expectations that the Fed could announce another
round of quantitative easing, known as QE3, after a two-day
policy meeting ends on Thursday were likely to support the euro
and riskier currencies like the Australian dollar in coming
days, traders said.
Sentiment towards the single currency has improved after the
European Central Bank last week unveiled a plan to cut borrowing
costs for indebted peripheral countries, although some
speculators took profit on the euro's recent rally.
Analysts said with Dutch elections and a German
constitutional court ruling on the euro zone permanent bailout
fund also due this week, investors would be wary of pushing the
single currency much higher.
"There's a good deal of event risk on the agenda but for now
even the euro bears are reluctant to be too bearish," said
Jeremy Stretch, head of currency strategy at CIBC.
"It may be the case that we grind higher with the Fed
decision on Thursday being the predominant driver. The risks of
more QE have increased since (U.S. jobs data on) Friday."
The euro was down 0.25 percent on the day at $1.2785,
still near Friday's high of $1.2818 on trading platform EBS,
which was its strongest since May 22.
There was strong chart resistance at the 200-day moving
average of around $1.2836, but the fact the euro had climbed
above $1.2750 suggested more gains were possible.
Westpac said in a note the euro may rise to $1.30 in the
near term and the dollar index could re-test the 2012 lows at
78.095 in coming weeks after a weak jobs report bolstered
expectations of more easing by the Fed.
The bank said risks around the German constitutional court's
pending decision on whether the rescue fund can go ahead were
exaggerated. It expected a favourable ruling on the fund, albeit
with some restrictions. Dutch election risks were also waning as
recent polls showed a tilt back toward pro-European parties, all
of which could see the euro target $1.33-1.34, it added.
But analysts said the single currency was still vulnerable
to developments in Spain, which may have to ask for a bailout,
and Greece, whose foreign lenders rejected parts of an austerity
package prepared by the government.
DOLLAR UNDER PRESSURE
The dollar index, which measures the currency's value
against a basket of currencies, stood at 80.319, stuck
near a four-month low of 80.151 hit on Friday after data showed
U.S. jobs growth slowed sharply in August.
In a Reuters poll conducted after the jobs report,
economists saw a 60 percent chance of the Fed embarking on QE3
this week, compared with 45 percent in a late August poll.
More stimulus from the Fed would make it attractive for
investors to use the dollar as a funding currency to buy
higher-yielding assets in carry trades.
Expectations of Fed easing have helped the Australian
dollar, which hit a two-week high of US$1.0401 on Friday, but
weak Chinese trade data put it under some pressure on Monday.
The Australian currency was last down 0.3 percent at $1.0353
after data showed a surprising year-on-year drop in
China's imports in August. The Aussie dollar tends to be
sensitive to economic data from China, Australia's biggest
The U.S. dollar was steady at 78.28 yen, hovering
near a one-month low of 78.016 hit on Friday.
Analysts said Japanese authorities may start stepping up
their rhetoric against the yen's rise if the dollar drops below
the early August low of 77.90 yen. There was also a risk the
Bank of Japan could ease policy when it next meets to neutralise
some of the impact from possible action by the Fed.
Either move would be negative for the yen.
"We remain of the view that in the current more favourable
market environment and on a risk-reward basis, building long
dollar/yen positions on pull-back close to the 78.00 mark is an
appealing strategy," BMO Capital Markets said in a note.