FOREX-Euro drops vs dlr on caution over Fed, ECB meetings

by on July 30, 2012 8:10 pm BST

Mon Jul 30, 2012 4:10pm EDT

* Euro retreats from 3-wk high vs dollar in cautious climate

* Poll shows ECB likely to restart bond buying program

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

* Fed not expected to unveil new measures this week

By Julie Haviv

NEW YORK, July 30 (Reuters) – The euro dropped against the
dollar for the first time in four days on Monday as investors
refrained from taking on risk ahead of key European Central Bank
and U.S. Federal Reserve policy meetings.

Fears that the ECB may not take strong enough action to
contain the region’s debt crisis and belief the Fed will not
announce new stimulus measures this week had the euro retreating
from Friday’s three-week high against the greenback.

Market expectations for action from the euro zone’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

“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.

Many, however, remain sceptical of ECB bond buying because
Germany has repeated its opposition to such a step.

“Traders were in ‘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.


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. Economists expect
policymakers to sit on their hands for now.

“We look for the Fed to extend its forward guidance language
to ‘at least late 2015’ at this week’s meeting,” Michael Hanson,
senior U.S. economist at BofA Merrill Lynch in New York, said in
a global research report.

“While there is a moderate chance of additional QE at this
meeting, we think it is more likely that the Fed will announce a
third round of asset purchases in September,” he said. “We look
for $600 billion of purchases, split roughly equally between
Treasury and MBS securities, through June 2013.”

A third round of bond buying, called quantitative easing,
would be negative for the dollar as it is tantamount to printing
money and therefore dilutes its value.

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.