FOREX-Euro firmer vs dollar; Aussie rises on stimulus hopes

by on July 31, 2012 6:05 am BST

Tue Jul 31, 2012 2:05am EDT

* Euro edges up vs dollar but below recent 3-week high

* Aussie dollar still strong on European stimulus hopes

* Focus on this week’s ECB policy decision

By Ian Chua and Masayuki Kitano

SYDNEY/SINGAPORE, July 31 (Reuters) – The euro edged higher
against the dollar on Tuesday but stayed off a recent three-week
high, while the Australian dollar hit a four-month high,
supported by expectations that major central banks may add more

The single currency moved up 0.1 percent from late U.S.
trade on Monday to $1.2274, but remained stuck below the
high of $1.2390 hit last Friday.

The focus is on the European Central Bank’s policy meeting
on Thursday, after ECB President Mario Draghi pledged last week
to do whatever was necessary to protect the euro zone from

“I think there are more options on the table than we can
think of right now. There’s a lot of anticipation after Draghi’s
comments,” said Jesper Bargmann, Asia head of G11 spot FX for
RBS in Singapore.

“The market seems to think that there are going to be some
strong measures and this should boost the commodity currencies
and some of the emerging market currencies,” he said.

A popular trade has been to short the euro against the
Australian dollar, New Zealand dollar and some emerging market
currencies, Bargmann added.

Draghi’s remarks last week have stirred market expectations
that the ECB may soon reactivate its bond-buying programme to
help cut Spanish and Italian borrowing costs.

“The most significant possible measure would be for the ECB
to buy bonds and to leave such purchases unsterilised, but I
don’t think such steps can be taken as they are likely to meet
German opposition,” said Satoshi Okagawa, senior global markets
analyst for Sumitomo Mitsui Banking Corporation in Singapore.

Last week, the ECB bought no government bonds via its
Securities Markets Programme (SMP) for a 20th straight week and
it has barely conducted such purchases this year, even as rising
borrowing costs in Spain fuelled jitters Madrid may eventually
need a full-blown sovereign bailout.

When the ECB bought government bonds in the past, it offset,
or sterilised, its purchases by draining equal amounts of
liquidity from the banking system to avoid stoking inflation.

The ECB probably won’t go so far as to deviate from this
convention, SMBC’s Okagawa said.

“At the same time, with market expectations running high,
they can’t afford to do nothing. They raised the bar high on
their own,” he added.

In any event, traders and analysts are sceptical that ECB
bond-buying by itself would be enough to change the euro’s weak
overall trend.

“It is a short-term relief, but it is not like people are
going to invest in Europe suddenly for that reason,” said
Bargmann at RBS.

“We’ve already seen some serious diversification, not just
out of the periphery but out of Europe altogether and these are
longer term decisions and they are not going to turn around in
the short-term,” Bargmann said, referring to a shift in asset
allocation by central bank reserve managers out of the euro.


The euro eased 0.2 percent against the high-flying
Australian dollar to A$1.1656, after having hit a
record low around A$1.1646 the previous day.

The Aussie and other high-beta currencies, which are
relatively volatile and tend to benefit when investor optimism
about the outlook for the global economy picks up, have been
among the best performers recently.

Such currencies have gotten a lift from market expectations
that both the ECB and Federal Reserve are closer to providing
more aid for their respective economies.

The Aussie rose 0.3 percent to $1.0526, having hit
a four-month high of $1.0538 earlier on Tuesday.

The modest rise in the euro weighed on the dollar index,
which measures the greenback’s value against a basket of major
currencies. The dollar index stood at 82.749, holding
near a three-week low of 82.343 hit last week.

Against the yen, the dollar edged up 0.1 percent to 78.26

While the Fed is seen likely to hold off from adopting
another bond-buying programme at its two-day policy meeting that
starts on Tuesday, some market players think the U.S. central
bank might adopt such monetary stimulus in coming months.