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FOREX-Euro falters, caution tempers ECB expectations

by on July 30, 2012 11:53 am BST
 

Mon Jul 30, 2012 7:53am EDT

* Euro pulls back from three-week high hit on Friday

* Traders wary of the scope for disappointment on ECB

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

By Nia Williams

LONDON, July 30 (Reuters) – The euro slipped on Monday as
investors became wary that hoped-for action from the European
Central Bank this week may fall short of expectations, prompting
traders to take profits on gains made late last week.

Some in the market have speculated the ECB may reactivate
its bond-buying programme to help cut Spanish and Italian
borrowing costs, but traders were aware that Germany has
repeated its opposition to this and they saw scope for
disappointment.

The central bank meets on Thursday. Talk of policy action
intensified after president Mario Draghi said last week the bank
would do whatever it took to save the euro, a message echoed by
German Chancellor Angela Merkel and French President Francois
Hollande.

But 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 mutualisation of euro zone debt.

The euro was down 0.5 percent at $1.2259, retreating
from a three-week high of $1.2390 hit on Friday, but still
holding above a two-year low of $1.2042 hit last Tuesday on
trading platform EBS.

“Draghi has to put some action behind his words last week
… The bias is towards disappointment and that’s what’s
creeping into markets now,” said Niels Christensen, currency
strategist at Nordea in Copenhagen.

“The value we saw last week in euro/dollar is fragile.”

Markets will keep an eye on any comments from U.S. Treasury
Secretary Timothy Geithner, who is due to meet German Finance
Minister Wolfgang Schaeuble and Draghi on Monday.

The U.S. Treasury said Geithner and the officials would
discuss the U.S., European and global economies.

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.

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Before the ECB meeting, analysts said euro losses were
likely to be limited.

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

But he said the euro’s failure on Friday to close above a
key technical level near $1.2325 was weighing on the currency.

The euro fell 0.8 percent to 95.85 yen, though it
remained above last week’s low of 94.12 yen, its lowest level
against the Japanese currency in more than 11-1/2 years.

It 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 fell 1.3
percent to 8.3400 crowns.

The Australian dollar also rallied, reaching a
record high of around A$1.1680 against the euro and a
four-month high of US$1.0500 versus the U.S. dollar.

Many market players said the Australian currency’s gains
could be vulnerable however, 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
US$1.0500.”

The Federal Reserve holds a policy meeting on Wednesday but
economists expect policymakers to sit on their hands for now.

The dollar was steady at 82.786 against a basket of major
currencies, above a three-week low of 82.343 hit on
Friday. Against the yen, the dollar eased 0.3 percent to 78.41
yen.