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FOREX-Euro drops vs dlr as imminent Fed, ECB meetings spur caution

by on July 30, 2012 6:30 pm BST
 

Mon Jul 30, 2012 2:30pm EDT

* Euro retreats from 3-wk high vs dollar on ECB concerns

* Poll shows ECB likely to restart bond buying program

* Policy decisions due this week in euro zone, U.S., UK

* Expectations for ECB actions high, but bank may disappoint

By Julie Haviv

NEW YORK, July 30 (Reuters) – The euro fell against the
dollar for the first time in four days on Monday as investors
remained cautious ahead of this week’s key European Central Bank
and U.S. Federal Reserve policy meetings.

Concern that the ECB may not take aggressive enough action
to contain the region’s debt crisis had the euro retreating
from Friday’s three-week high against the greenback and hitting
a record low against the Australian dollar.

Market expectations for action from the bloc’s central bank,
which holds its policy meeting on Thursday, have grown sharply
after ECB President Mario Draghi said last week the bank would
do whatever it takes to save the euro, a message echoed by
German Chancellor Angela Merkel and French President Francois
Hollande.

“Last week’s euro rally was pretty aggressive, so it makes
sense that we are seeing some consolidation today,” said John
Doyle, director of markets at Tempus Consulting in Washington,
D.C. “Overall, there is really no good reason to be buying the
euro, especially with Spain and Italy remaining big issues.”

Against the dollar, the euro fell 0.5 percent to
$1.2258. That is down from Friday’s three-week high of $1.2389,
but above last Tuesday’s two-year low of $1.2040, according to
Reuters data.

Adding to bearish sentiment was the euro’s failure on Friday
to close above a key technical level near $1.2325.

Tempus’ Doyle said he expects the euro to stay within the
range of $1.21 to $1.2350 for another week or two, with
medium-term support at $1.2050.

“The euro will get a bump on ECB action, but sellers should
emerge at the $1.25 level,” he said.

The ECB will probably say that it will re-start its dormant
government bond buying programme with the aim of lowering
Spanish and Italian government bond yields, a Reuters poll of
money market traders showed.

While some speculate the ECB may reactivate its program to
help reduce Spanish and Italian borrowing costs, many were
sceptical because Germany has repeated its opposition to such a
step.

“Traders were in a ‘Show me’ mode, with enthusiasm fading
over last week’s comments by both Mario Draghi and Angela Merkel
in support of the euro,” said Boris Schlossberg, managing
director of FX strategy at BK Asset Management in New York.

German Economy Minister Philipp Roesler warned the ECB about
any large-scale government bond purchases and a German
government spokesman on Monday reiterated Berlin’s opposition to
any form of mutualization of euro zone debt.

Analysts said the ECB might explore new policy tools such as
outright asset purchases, or quantitative easing, something its
peers in Britain, the United States and Japan are already using
to stimulate growth.

There have been recent suggestions it could also empower
national central banks to broaden their asset-buying abilities.

U.S. Treasury Secretary Timothy Geithner and German Finance
Minister Wolfgang Schaeuble expressed confidence in the ability
of euro zone member states to implement reforms and achieve
greater integration to overcome their debt crisis.

The Australian dollar, meanwhile, rallied, reaching a
record high of around A$1.1646 against the euro and a
four-month high of $1.0508 versus the U.S. dollar.

BUSY WEEK

Markets were bracing for a busy week, with central bank
decisions due in the United States and the UK as well as the
euro zone, in addition to key U.S. jobs data on Friday.

The U.S. Fed begins a policy meeting on Tuesday and its
decision will be announced on Wednesday, but economists expect
policymakers to sit on their hands for now.

In related news, foreign exchange turnover rose slightly in
North America but slipped elsewhere in the world in early 2012
when compared with the year earlier period, according to a
semiannual survey of major central banks on Monday.

Against the Japanese yen, the dollar eased 0.3 percent to
78.18 yen, according to Reuters data.