August 21, 2012 / 12:45 AM / 7 years ago

Euro hits 7-week high on speculation ECB will take action

NEW YORK (Reuters) - The euro rose to a seven-week high against the U.S. dollar on Tuesday on talk the European Central Bank may act soon to lower the borrowing costs of Spain and Italy, allaying concerns about the debt crisis that has long plagued the region.

Japanese 10,000 yen notes (L) featuring a portrait of Yukichi Fukuzawa, the founding father of modern Japan, $100 notes, featuring an image of Benjamin Franklin, and Chinese 100 yuan notes, featuring an image of former Chinese leader Mao Zedong, at the main office of the Korea Exchange Bank are seen in this picture illustration taken in Seoul October 22, 2010. REUTERS/Truth Leem

Throughout August the euro has rallied and plunged almost daily depending on the latest headlines from Europe. Uncertainties over the effectiveness of ECB bond-buying and worries over the euro zone’s debt and economic problems had kept the currency firmly below this month’s high of $1.2443.

The euro, however, pierced that level after London’s Daily Telegraph report on Monday gave support to a weekend article in Germany’s Der Spiegel magazine that said the ECB planned to put a hard cap on Spanish and Italian bond yields.

An ECB spokeswoman, asked about the Telegraph story, repeated the central bank’s statement after the Der Spiegel report, saying it was misleading to report on policy decisions that had not been taken.

“We’re in the midst of a risk rally, with expectations high around what could happen in the first couple of weeks of September,” said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.

The ECB holds its next policy meeting on September 6 and European Union finance ministers meet on September 14-15 - 10 days seen as critical for efforts to quell the crisis and keep Greece in the single currency.

The U.S. Federal Reserve will meet on September 12-13.

“We may see a dovish Fed and an ECB that firms up its plan,” Sutton said.

Until September, the euro should be tied to its summer range of roughly between $1.21 to $1.2630, she said.

The euro rose to $1.2488, its highest since July 5, exceeding the August 6 peak of $1.2443 reached after ECB President Mario Draghi pledged to do all it takes to preserve the euro. Prior to Draghi’s comments, the single currency fell to a two-year low of $1.2040 on July 24.

The euro was last at $1.2462, up 1 percent on the day.

Traders said it extended gains after triggering stop-loss buy orders on the break above $1.2400.

“The ECB must act in the bond market because threats, leaks and promises have a limited lifespan. Without ECB intervention Spanish and Italian rates will rise again as the countries no longer have the confidence of the credit markets,” said Joseph Trevisani, chief market strategist at Worldwide Markets, Woodcliff Lake in New Jersey

The euro rose as high as 99.18 yen, its strongest since early July. It last traded at 98.72, up 0.7 percent on the day.

French President Francois Hollande and German Chancellor Angela Merkel will meet on Thursday, a day before Greek Prime Minister Antonis Samaras arrives in Berlin.

Samaras is expected to lobby for a two-year extension of austerity measures to soften their impact, though he is unlikely to win major concessions.


The dollar will likely react to the release on Wednesday of minutes from the latest Federal Open Market Committee meeting, the Fed’s policy making arm.

Any hint that the Fed may soon embark on a third round of quantitative easing would have a negative impact on the dollar as it is tantamount to the Fed’s printing money and dilutes the greenback’s value.

Also on the radar screen is Fed Chairman Ben Bernanke’s annual speech in Jackson Hole, Wyoming at the end of the month. It was at this same event in 2010 that the Fed laid the groundwork for a second round of bond buying to buoy the economy, called quantitative easing.

Joseph Balestrino, senior vice president, fixed income strategist at Federated Investment Management in Pittsburgh, Pennsylvania, said he does not expect the Fed to embark on more stimulus at this point.

Stacks of Swiss franc, Euro and U.S. dollar banknotes are displayed in a bank in Bern August 15, 2011. REUTERS/Pascal Lauener

“At the next Fed meeting I think they will do nothing again,” he said. “At Jackson Hole, Bernanke will likely acknowledge that the economy is still on shaky ground, but not sufficiently weak to warrant explicit QE3.”

If the Fed does decide to launch QE3 it would likely entail buying mortgage-backed securities, he said.

The dollar was last down 0.2 percent against the yen at 79.24 yen, down from the high of 79.66 yen hit on Monday, the highest since July 12, according to Reuters data.

Additional reporting by Nick Olivari and Anthony Esposito; Editing by Diane Craft

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