April 2, 2014 / 8:27 AM / in 4 years

Euro loses verve as caution sets in before ECB review

SYDNEY (Reuters) - The euro nursed modest losses early on Thursday, having come under pressure as the market turned cautious on expectations the European Central Bank may sound dovish following its policy review later in the day.

While most analysts do not think the ECB will ease this week, recent price data have upped the ante for the bank to do more soon to tackle the threat of deflation.

Indeed, the head of the International Monetary Fund on Wednesday called on the ECB to ease policy, warning “low-flation” in advanced economies risked undercutting an already sluggish global recovery.

The euro traded at $1.3765, having retreated from a one-week high of $1.3821. Against the yen, it dipped to 142.98 from a four-week high of 143.48.

A Reuters poll of over 60 foreign exchange strategists taken this week predicted the euro would fall to $1.37 in one month, $1.33 in six and $1.29 in a year.

“If we do get actual rate cuts, we would look for EUR/USD to fall rather sharply towards 1.36, with a decision to introduce a negative deposit rate likely to see a particularly large reaction,” analysts at BNP Paribas wrote in a note to clients.

“Introducing new liquidity measures would have a smaller impact...while a simple repeat of last month’s disappointingly neutral message could squeeze weaker shorts out and see EUR/USD test back towards 1.39.”

The fall in the euro helped the dollar index .DXY edge up to 80.229, although it remained in a slim range ahead of Friday’s U.S. jobs data.

A one Euro coin is placed over one dollar notes in this illustrative photograph taken in Madrid November 17, 2011. REUTERS/Sergio Perez

Against the yen, the dollar rose to its highest in over two months at 103.94 thanks to upbeat private-sector jobs and factory orders data that lifted Treasury yields.

The euro also ceded ground against the Australian dollar but managed to outperform the New Zealand currency, which came under heavy profit taking across the board.

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Traders said the trigger for Wednesday’s rout in the kiwi was a drop in international milk prices for a fourth consecutive bi-monthly auction at New Zealand’s Fonterra, the world’s largest dairy exporter.

As the dairy sector generates more than 7 percent of the nation’s gross domestic product, the result came as a blow to kiwi bulls and helped take some of the froth off the currency.

The kiwi suffered its biggest one-day fall in over two months, pulling back sharply from a 2-1/2 year high set on Wednesday.

It was last at $0.8573, down more than 1 percent from the peak of $0.8702. The kiwi also posted its biggest fall in over two months against the Aussie, which climbed as far as NZ$1.0808, the highest since February 26.

Ahead of the ECB policy meeting, there is a slew of economic news out of Asia to distract investors. In Australia, retail sales is due at 0030 GMT, followed by China’s non-manufacturing PMI at 0100 GMT.

U.S. non-farm payrolls on Friday remains the big ticket item that many investors are focused on. Any upside surprise should lift the greenback as it would cement the Fed’s path of unwinding its ultra-loose stimulus.

Editing by Shri Navaratnam

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