* Nervous investors await ECB action after Draghi comments
* Aussie hits record high vs euro
* Focus on this week's ECB and Fed meetings
By Michael Szabo
LONDON, July 31 The euro rose against the dollar
on Tuesday on month-end demand, but stayed below three-week
highs on doubts the European Central Bank can meet market
expectations of bold steps to combat the debt crisis.
Expectations that the ECB may lower interest rates in coming
months saw the euro hit a record low against the higher-yielding
Australian dollar. The Aussie was also buoyed by comments from
Chinese premier Wen Jiabao that China would fine-tune policy to
support economic growth.
The single currency rose 0.25 percent against the dollar to
$1.2285, well below the high of $1.2390 hit last Friday.
Traders said the euro moved higher due to buying by a sovereign
investor in the euro/sterling currency pair, probably to meet
That led to some to pare bets on euro weakness. Traders
cited strong offers to sell the currency above $1.2300 while
bids were layered below $1.2250 and stop losses at $1.2220.
Investors are focused on Thursday's ECB policy meeting after
bank chief Mario Draghi pledged last week to do whatever was
necessary to preserve the euro. That raised expectations of a
bold ECB response, a move that could boost the currency.
But investors are increasingly questioning how much the ECB
can deliver, given euro zone paymaster Germany is opposed to the
central bank buying government bonds in the secondary market and
granting a banking licence to the bloc's rescue fund.
"There is a clear danger that expectations might be too
high...He's got to put his money where his mouth is, as there is
a risk of disappointment around Thursday," said Nick Parsons,
head of markets strategy at nabCapital in London.
If the ECB does not signal further measures, the euro could
fall back below $1.2130, he said, but a firm response could lift
it above last week's peak.
"After that you'd really be looking at $1.2693, the high on
the last trading day of June, but we'd really need to see
monetary shock and awe to take to us to those sorts of levels,"
Such "shock" is unlikely with most traders and analysts
sceptical that a resumption of ECB bond-buying by itself would
be enough to change the euro's weak overall trend. Expectations
of further ECB interest rate cuts would keep sentiment towards
the currency negative, analysts said.
Earlier this month, the ECB cut its deposit rate, at which
banks park excess funds with the bank, to zero, making the euro
a funding currency for investors seeking higher yields.
Since the rate cut, analysts said a popular trade has been
to sell the euro against the higher-yielding Australian dollar.
The euro fell to a record low of A$1.1645 on Tuesday.
Analysts said central banks have also increased holdings of
higher-yielding currencies and that could be one reason why the
Australian dollar has been in demand. The Aussie hit a
four-month high against the U.S. dollar at $1.0539.
"We've already seen some serious diversification, and these
are longer-term decisions and they are not going to turn around
in the short term," said Jesper Bargmann, Asia head of G11 spot
FX at RBS, Singapore, referring to a shift in asset allocation
by central bank reserve managers out of the euro.
The Swiss National Bank on Tuesday published data on its
foreign exchange reserves, showing a second quarter increase in
euros as well as in "other" currencies.
"The (data) suggests the central bank had been an active
buyer of currencies including the Australian dollar (and)
Swedish crown," UBS FX strategist Geoffrey Yu said in a note.
These growth-linked currencies tend to benefit when optimism
about the outlook for the global economy picks up.
While the Federal Reserve is likely to hold off from
adopting another bond-buying programme at its two-day policy
meeting that starts on Tuesday, some players think it might
adopt such monetary stimulus in coming months.
The dollar edged up 0.1 percent to 78.18 yen.