* Markets cautious that euro strength may concern ECB
* Could dip further before ECB meeting on Thursday
* But broader trend for further gains intact
* Yen remains weak, earlier hit 33-month low vs dollar
By Jessica Mortimer
LONDON, Feb 6 The euro slipped on Wednesday,
with traders taking more cautious positions ahead of the
European Central Bank meeting in case its president Mario Draghi
expresses concern about the high level of the euro.
However, most analysts believe Draghi will avoid commenting
on the currency, instead cautiously recognising the improvement
in the euro zone outlook and in market sentiment while
acknowledging the region still faces many hurdles.
Traders said the euro was likely to be sold on any rallies
ahead of Thursday's ECB meeting, but it could resume its recent
The euro was down 0.4 percent at $1.3526, edging away
from last week's 14-month high of $1.3711, with political
uncertainty in Spain and Italy also weighing.
Against the yen the euro was down 0.3 percent at 126.75 yen
, off a 34-month peak of 127.71 yen hit in Asian
trade, with the yen remaining under selling pressure on
expectations of aggressive monetary easing in Japan.
French President Francois Hollande called on Tuesday for a
target exchange rate to protect the currency from "irrational
movements", although the idea ran into immediate opposition from
The ECB is expected to leave interest rates on hold on
Thursday and the focus will be on Draghi's subsequent news
"The market is a bit nervous ahead of the ECB meeting ...
people would like to know what the ECB's position is as regards
Hollande's comments," said Antje Praefcke, currency strategist
at Commerzbank in Frankfurt.
She said she expected Draghi to be cautious and avoid
commenting directly on the currency, although he was likely to
face questions about it. If Draghi did comment on the
potentially harmful impact of a stronger euro, however, it could
be seen by the market as a kind of verbal intervention.
Analysts at Deutsche Bank recommended clients take profit on
long euro positions at this point. They said they were "turning
more neutral" on euro/dollar, though they still expect a
$1.35-$1.40 range for the rest of the first quarter.
The euro's trade-weighted index has risen 3
percent since early January, but analysts still see scope for
more, albeit more gradual, gains.
"The next target is $1.36 and then $1.38 when the euro
should run out of steam. I think $1.40 is a bit too far,
especially given the political problems that have already
arisen," Commerzbank's Praefcke said.
Banks have been repaying the ECB's ultra-cheap three-year
loans which has acted as an effective tightening of euro zone
monetary policy at a time when the U.S. Federal Reserve and the
Bank of Japan are expanding their balance sheets.
The dollar last up 0.15 percent on the day at 93.76 against
the yen, just below a 33-month peak of 94.075 hit in
Asian trade. Traders reported hedging-related demand and buying
by longer-term investors, with supporting bids at 93.50 yen.
News on Tuesday that current Bank of Japan Governor Masaaki
Shirakawa will step down three weeks earlier than planned
spurred the latest bout of yen selling.
Japanese Prime Minister Shinzo Abe, who has put the BOJ
under pressure to do more to spur the economy, has made it clear
he wants a governor who will be bold in easing monetary policy.
"As far as Japan is concerned they are exceeding market
expectations with the pace of policy implementation and that's
going to keep the yen under pressure," said Ian Stannard,
European head of FX strategy at Morgan Stanley.
He said Morgan Stanley's first quarter forecast of 95 yen
was likely to be exceeded, and a test of 98 to 100 yen was now
Trends in FX options reflected widespread expectations of
more yen weakness. Implied volatility on one-month dollar/yen
options - a measure of expected price movements - rose above 13
percent to hit its highest since August 2011.