FOREX-Euro gains vs dollar, yen; poised to end July weaker

by on July 31, 2012 6:48 pm BST

Tue Jul 31, 2012 2:48pm EDT

* Nervous investors await ECB action after Draghi comments
    * Investors focus on ECB and Fed meetings
    * Euro-zone joblessness hits highest since start of euro
    * SNB reserves show lofty euro holdings

    By Julie Haviv
    NEW YORK, July 31 (Reuters) - The euro climbed against the
dollar and yen on Tuesday, but tempered expectations surrounding
this week's European Central Bank meeting kept investors wary of
betting aggressively on the single currency.
    While the euro outperformed on speculation that the ECB
could revive its bond-purchase program to help lower borrowing
costs of debt-stricken Spain and Italy, it has notched sizable
losses against the dollar and yen in July, losing 2.9 percent
and 4.9 percent in value, respectively.
    The ECB will meet on Thursday, the day after the U.S.
Federal Reserve ends its two-day policy meeting. Some fear the
central banks may not deliver enough stimulus to assuage fears
about a global economic slowdown.
    Expectations of ECB bond buying have grown ever since its
President Mario Draghi said last week the bank would do whatever
it takes to save the euro, causing the shared currency to rise 
against the dollar in four out of the past five sessions.
     Analysts cautioned, however, that the banks may disappoint.
     "The euro got a little ahead of itself on Fed and ECB
expectations, and both meetings will likely disappoint," said
Brad Bechtel, managing director at Faros Trading in Stamford,
    "The euro crosses are very much in play, particularly
against the Canadian and Australian dollars, which are vehicles
being used to express euro-zone doubt and uncertainty," he said.
"The ECB will likely reiterate it is ready to take action, but I
think they will fall short of announcing anything significant."
    The euro rose as high as $1.2329, according to
Reuters data, still below a three-week high of $1.2389 set last
week. It was last at $1.2292, up 0.3 percent. It also rose 0.3
percent against the yen, to 96.08 yen.
    "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."
    Month-end demand also bolstered 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.
    With much of the euro zone mired in a recession most believe
the euro's upside is limited, with investors likely to sell on
    Indeed, joblessness in the euro zone hit its highest level
since the single currency was born. Meanwhile,
data showed that capital flight from Spain, the euro zone's
fourth-largest economy, accelerated in May. 
    Near-bankrupt Greece, meanwhile, reported that it is fast
running out of cash as it awaits the next installment of aid
from international lenders. 
    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.
    Investors also await the U.S. Fed's policy announcement at
the end of its two-day meeting on Wednesday. While the Fed is
likely to hold off from undertaking another bond-buying program
for now, some analysts say it might adopt such monetary stimulus
in coming months.
    Against the yen, the dollar was flat at 78.18 yen,
according to Reuters data. 

    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 increased euro holdings have some speculating 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.