0 comments

FOREX-Euro falls vs dollar as markets await ECB action

by on July 30, 2012 4:11 pm BST
 

Mon Jul 30, 2012 12:11pm EDT

* Euro declines to record low vs Australia dollar

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

* Expectations for ECB actions high, but bank may disappoint

By Wanfeng Zhou

NEW YORK, July 30 (Reuters) – The euro fell on Monday,
hitting a record low against the Australian dollar, on worries
the European Central Bank may disappoint investors hoping for
more actions to contain the euro zone debt crisis.

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.

Some in the market speculated the ECB may reactivate its
bond-buying program to help reduce Spanish and Italian borrowing
costs, but many were skeptical 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.

The euro fell 0.6 percent to $1.2244, retreating from
a three-week high against the U.S. dollar of $1.2389 hit on
Friday, but was holding above a two-year low of $1.2040 touched
last Tuesday, 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.

Still, near-term losses in the euro could be limited as
traders were unlikely to place large bets ahead of the ECB
meeting, analysts said.

“Clearly, if nothing is announced that would be a massive
disappointment,” said Callum Henderson, global head of FX
research for Standard Chartered Bank in Singapore. “But there is
an expectation that we’re going to see something meaningful on
Thursday.”

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 on Monday in
the ability of euro zone member states to implement reforms and
achieve greater integration to overcome their debt crisis.

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 euro fell 1 percent to 95.68 yen, though it
remained above last week’s low of 94.09 yen, its lowest level
against the Japanese currency in more than 11-1/2 years.

Against the Japanese yen, the dollar eased 0.3 percent to
78.17 yen.

The euro also struggled against the Swedish crown, which hit
a 12-year high after data showed the Swedish economy grew much
more than expected in the second quarter. The euro
slid 1.7 percent to 8.3225 crowns.

The Australian dollar 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.

However, many market players said the Australian currency’s
gains could be vulnerable given its close correlation with the
global growth outlook.

“People are selling euro/Aussie and that provides
Aussie/dollar with an indirect degree of support. But exposure
there is pretty big if we get any negative economic developments
in Asia and if Draghi and (Federal Reserve Chairman Ben)
Bernanke do not deliver,” said Daragh Maher, FX strategist at
HSBC.

“Our view is we would sell Aussie on any firm break above
$1.0500,” Maher added.

The Federal Reserve 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.

The dollar rose 0.2 percent to 82.894 against a basket of
major currencies, rebounding from a three-week low of
82.343 on Friday.