* Euro drops as German and French economies contract in Q4
* BOJ holds steady as expected
* Investors cautious before a G20 summit
By Anirban Nag
LONDON, Feb 14 The euro fell on Thursday after
data painted a grim picture of the euro zone economy, serving as
a reminder to investors that the region is still struggling with
its debt crisis.
The euro zone's two largest economies, France and Germany,
both contracted in the fourth quarter, pushing the currency bloc
deeper into recession and throwing a first-quarter recovery into
doubt. That bolstered inflows into safe-haven German Bunds and
fanned expectations the European Central Bank may have to lower
interest rates in coming months.
All of which is likely to keep the euro off its recent highs
of above $1.37. The euro was down 0.5 percent at $1.3390, well
below a one-week high of $1.3520 struck on Wednesday.
Stop-loss sell orders are cited below $1.3365 while resistance
is seen around $1.3530, the 50 percent retracement mark of the
single currency's Feb. 1-11 fall.
Against the yen, the euro was down 0.4 percent at
125.22 yen, with stop loss orders cited below 125 yen.
"The GDP numbers were weaker-than-expected and while it's
not dramatic, going forward if data continues to weaken and does
not reflect the improved financial conditions we may see some
monetary policy response from the ECB," said Paul Robson,
currency strategist at RBS.
Those worries are likely to pin the euro down, he said.
The euro has risen nearly 1.5 percent against the dollar and
more than 9 percent against the yen this year after the ECB
started to withdraw some of its unconventional monetary policy
easing, at a time when both the Federal Reserve and the Bank of
Japan were expanding their balance sheets by printing more
And while data earlier in the year out of Germany showed
some signs of stabilising, peripheral euro zone countries have
continued to struggle in the face of tough austerity measures.
Still, financial conditions in the euro zone have improved
as reflected in peripheral bond yields that are well below their
highs struck last year, lending solid support to the euro.
"Some investors are confused as to the future course of the
euro, since its recent rise wasn't due so much to fundamentals,"
said Kimihiko Tomita, head of forex at State Street in Tokyo.
Another reason for investors to stay cautious about the euro
is the risk of a tough statement on currencies from a G20 summit
this weekend. Speculation has continued that the G20 may apply
pressure on Japan to slow the yen's slide.
The yen has lost considerable ground after a new
administration in Tokyo piled pressure on the Bank of Japan to
deliver aggressive stimulus steps. Investors are nervous about
the outcome of a G20 finance ministers and central bank
officials which starts on Friday.
G7 nations - Britain, the United States, Japan, Germany,
France, Italy and Canada - said this week that fiscal and
monetary policies must be directed at domestic economies and not
at targeting exchange rates.
But confusion reigned after a G7 official responded by
saying it was aimed squarely at Tokyo, a comment that prompted
the yen to surge on a volatile foreign exchange market.
While the yen was higher against the euro, it slipped
against the dollar. The dollar traded at 93.54 yen, up
0.3 percent but still well below a 33-month high of 94.465 set
Earlier, the BOJ kept policy steady as expected and revised
up its assessment of the Japanese economy.
Some believe the BOJ might hold off on expanding stimulus
next month, and wait until the first rate review under its new
governor, scheduled for April 3-4.
BOJ Governor Masaaki Shirakawa will leave three weeks ahead
of the end of his five-year term, clearing the way for slightly
earlier implementation of aggressive easing under his successor.
"This is the BOJ's 'lame duck session,' so it is natural
that they didn't do anything today, and perhaps not next month,"
said Citibank Japan chief FX strategist Osamu Takashima.
"But the market expects monetary easing under the new
governor," he added.
Data released on Thursday showed Japan's economy contracted
for the third consecutive quarter in October-December, adding
weight to the new government's push for radical policies to
revive growth and whip deflation.