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FOREX-Euro edges higher vs dollar on ECB speculation

by on July 27, 2012 8:09 pm BST
 

Fri Jul 27, 2012 4:09pm EDT

* Euro hits 3-week high versus the dollar

* Uncertainty still over what ECB would do to stem crisis

* U.S. 2nd quarter GDP data not as weak as feared

By Wanfeng Zhou

NEW YORK, July 27 (Reuters) – The euro rose to a three-week
high against the U.S. dollar in volatile trade on Friday on
speculation the European Central Bank may take further action to
contain a spreading debt crisis, but a lack of details capped
gains.

The euro rose to a session high after Bloomberg reported
that ECB President Mario Draghi would meet with the head of
Germany’s Bundesbank, Jens Weidmann, to discuss several
measures, including bond purchases, to stem the euro zone debt
crisis. Weidmann is a member of the ECB Governing Council.

But caution quickly returned as investors said it remained
unclear what actions the ECB might take given Germany’s
resistance to ECB bond buying. Some analysts also said the
currency’s three-day rally this week is overdone.

Asked about the report of Draghi’s meeting with Weidmann, a
spokeswoman for the European Central Bank said it was usual
practice for Draghi to meet with Governing Council members. The
spokeswoman declined further comment.

“Fundamentally, there’s a lot of uncertainty and still a lot
of unanswered questions as to how exactly the ECB plans to bring
down sovereign borrowing costs,” said Omer Esiner, chief market
analyst at Commonwealth Foreign Exchange in Washington.

“To some extent, the rally in the euro and more broadly
equities and risk assets had gotten a little bit ahead of
itself.”

The euro last traded at $1.2305, having risen as high
as $1.2389 on Reuters data, the best level since July 6. It also
rose 0.7 percent to 96.72 yen.

A string of positive comments from ECB officials has lifted
the euro above a two-year low of $1.2040 set earlier this week.

On Thursday, Draghi said the ECB would do whatever it takes
to protect the euro zone from collapse and preserve the single
currency. On Wednesday, Ewald Nowotny, a member of the ECB’s
Governing Council, said he could see grounds for giving the euro
zone bailout fund a banking license.

German Chancellor Angela Merkel and French President
François Hollande said on Friday that they are “deeply committed
to the integrity of the euro zone” and “are determined to do
everything to protect the euro zone.”

“They are going to have to back it up at some point, but
investors are not going to stand in the way of the European
Central Bank and governments in the short term,” said Joseph
Trevisani, chief market strategist at Worldwide Markets in
Woodcliff Lake, New Jersey.

The ECB, which cut interest rates to a record low in early
July, will meet again next Thursday to decide on interest rates
and discuss policy measures. It has previously bought government
bonds in the secondary market to push yields lower, and pressure
is building on it to do more.

On the week, the euro gained 1.5 percent against the dollar,
the biggest rise since the week ended June 10.

Against the yen, the dollar advanced 0.5 percent to 78.56
yen and was up 0.2 percent for the week after the
Commerce Department reported that U.S. economic growth slowed,
as expected, in the second quarter.

The gross domestic product number may not be enough to push
the Federal Reserve to pump more money into the economy in the
near term, according to some strategists.

“The GDP data was at the margin fractionally stronger than
expected and plays perfectly to the pre-release thinking that
the Fed can wait for more clarity on the economy from the next
two employment reports before enacting (or not) additional QE
measures at the September FOMC meeting,” said Alan Ruskin, head
of G10 FX strategy at Deutsche Bank in New York.

A rally in stocks lifted risk appetite, driving the
Australian dollar to a three-month high against the U.S.
dollar. The Aussie dollar was last up 0.8 percent at $1.0479
. The New Zealand dollar jumped 1 percent to $0.8094
.