FOREX-Euro gains versus dollar, yen on ECB expectations

by on July 31, 2012 3:59 pm BST

Tue Jul 31, 2012 11:59am EDT

* Nervous investors await ECB action after Draghi comments
    * Australian dollar hits record high vs euro
    * Investors focus on ECB and Fed meetings

    By Wanfeng Zhou
    NEW YORK, July 31 (Reuters) - The euro edged higher against
the dollar and yen on Tuesday on expectations the European
Central Bank may take further actions to help contain the debt
crisis later this week.
    Speculation grew the ECB could revive its bond purchase
program to help lower the borrowing costs of debt-stricken Spain
and Italy after the bank's president, Mario Draghi, said last
week the bank would do whatever it takes to save the euro.
Analysts cautioned, however, the bank may disappoint.
    "It's going to be more or less buy the rumor, sell the
fact," said Michael Woolfolk, senior currency strategist at BNY
Mellon in New York. "So expect the euro to be well supported up
to just before the decision, and then probably some
profit-taking thereafter."
    The ECB is to meet on Thursday, the day after the U.S.
Federal Reserve ends its two-day policy meeting.
    The euro rose as high as $1.2329 on Reuters data,
still below a three-week high of $1.2389 set last week. It was
last at $1.2316, up 0.5 percent. It also rose 0.4 percent
against the yen, to 96.16 yen.
    Month-end demand also supported the euro as traders reported
sovereign buying in the euro/sterling and euro/Swiss franc
currency pairs. Traders cited strong offers above $1.2300 while
bids were layered below $1.2250 and stop losses at $1.2220. 
    Many analysts questioned how much the ECB can deliver, given
the opposition of Germany, the euro zone's biggest economy and a
key player in the debt crisis, to some proposed solutions.
    Germany has been opposed to the central bank buying
government bonds in the secondary market. And Germany's Finance
Ministry reiterated its view on Tuesday that there is no need to
grant a banking license to the euro zone's new bailout fund, a
move that could enable it to buy virtually unlimited amounts of
debt issued by troubled euro zone states. 
    "There is a clear danger that expectations might be too
high," said Nick Parsons, head of markets strategy at nabCapital
in London, adding that Draghi has "to put his money where his
mouth is, as there is a risk of disappointment around Thursday."
    If the ECB does not signal further measures, the euro could
fall below $1.2130, but a firm response could lift it above last
week's peak, Parsons said. 
    "After that you'd really be looking at $1.2693, the high on
the last trading day of June, but we'd really need to see
monetary shock and awe to take to us to those sorts of levels,"
he added.
    Investors also awaited a policy announcement from the
Federal Reserve at the end of its two-day meeting on Wednesday.
While the Fed is likely to hold off from adopting another
bond-buying program for now, some analysts say it might adopt
such monetary stimulus in coming months.
    Against the yen, the dollar slipped 0.1 percent to 78.09 yen

    The euro hit a record low against the higher-yielding
Australian dollar of A$1.1638. Expectations that the
ECB may lower interest rates again in the coming months have
made the euro a favorite funding currency for investors seeking
higher yields.    
    The Australian dollar also hit a four-month high against the
U.S. dollar at $1.0538, buoyed by comments from Chinese
premier Wen Jiabao that China would fine-tune policy to support
economic growth.  
    Analysts said long-term investors like central banks have
also increased holdings of high-yielding currencies, especially
at the expense of the euro.
    Data from the Swiss National Bank showed an increase in euro
holdings in the bank's foreign-exchange reserves in the second
quarter, as it has been defending the 1.20 franc per euro peg
since last September by buying the common currency.
    The increase in euro holdings led to speculation that the
SNB may soon be selling euros in favor of other growth-linked
currencies such as the Australian dollar. 
    "With an estimated 184 billion euros still on its balance
sheet, continued future offloading of euros could have a
meaningful impact on euro crosses," said Geoffrey Kendrick,
currency analyst at Nomura.
    U.S. data on Tuesday showed home prices climbed for the
fourth month in a row in May and consumer confidence
unexpectedly rose in July. Government data showed consumer
spending fell in June for the first time in nearly a year when
accounting for inflation, while household income rose. The
market impact was limited as investors focused on the Fed and
ECB meetings this week.