FOREX-Euro steady, investors nervous before ECB meeting

by on July 31, 2012 9:31 am BST

Tue Jul 31, 2012 5:31am EDT

* Nervous investors await ECB action after Draghi comments

* Aussie near record higher vs euro

* Focus on this week’s ECB and Fed meetings

By Michael Szabo

LONDON, July 31 (Reuters) – The euro was subdued against the
dollar on Tuesday, trading below recent three-week highs on
growing doubts the European Central Bank can meet market
expectations of bold steps to combat the euro zone debt crisis.

The euro hit a record low against the growth-linked
Australian dollar, with higher-yielding currencies retaining
gains on expectations that both the ECB and the U.S. Federal
Reserve will nonetheless ease policy to support faltering

The single currency was flat at $1.2260, staying
below the high of $1.2390 hit last Friday. Traders cited bids at
$1.2250/60 with stop-loss orders below $1.2225. Offers to sell
the euro were reported above $1.2300, all of which are likely to
keep the euro in a tight range, traders said.

Investors are focused on the ECB policy meeting on Thursday,
after President Mario Draghi pledged last week to do whatever
was necessary to protect the euro zone from collapse. That
raised expectations of a bold response to the euro zone crisis
from the ECB, a move which could give the euro a boost.

But investors are increasingly questioning how much the ECB
can deliver, given euro zone paymaster Germany is opposed to the
central bank buying government bonds in the secondary market and
granting a banking licence to the bloc’s rescue fund.

“There is a clear danger that expectations might be too
high…He’s got to put his money where his mouth is, as there is
a risk of disappointment around Thursday,” said Nick Parsons,
head of markets strategy at nabCapital in London.

If the ECB does not signal further policy measures, the euro
could fall back below $1.2130, he said, but a firm response
could lift it above last week’s peak.

“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,”
Parsons added.

Such a “shock” is unlikely with most traders and analysts
sceptical that a resumption of ECB purchases of government bonds
by itself would be enough to change the euro’s weak overall
trend. That is largely because expectations of further interest
rate cuts by the ECB would keep sentiment towards the currency
negative, analysts said.

Earlier this month, the ECB cut its deposit rate, at which
banks park excess funds with the bank, to zero, making the euro
a funding currency for investors seeking higher yields.


Since the rate cut, analysts said a popular trade has been
to sell the euro against the higher-yielding Australian dollar.
The euro fell to a record low of A$1.1645 on Tuesday.

Analysts said central banks have also increased holdings of
higher-yielding currencies and that could be one reason why the
Australian dollar has been in demand. The Aussie was trading
near a four-month high against the U.S. dollar at
$1.0515, having hit $1.0538 earlier in the day.

“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,” said Jesper Bargmann, Asia head of G11 spot FX
at RBS, Singapore, referring to a shift in asset allocation by
central bank reserve managers out of the euro.

The Swiss National Bank said on Tuesday published data on
its foreign exchange reserves, showing a second quarter increase
in euros as well as in “other” currencies.

“The (data) suggests the central bank had been an active
buyer of currencies including the Australian dollar (and)
Swedish crown,” UBS FX strategist Geoffrey Yu said in a note.

These growth-linked currencies tend to benefit when optimism
about the outlook for the global economy picks up.

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.

The dollar edged up 0.2 percent to 78.27 yen.