September 10, 2012 / 11:16 AM / 7 years ago

FOREX-Euro retreats but Fed easing talk supportive

* 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 (Reuters) - 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.


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 export market.

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.

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