FOREX-Euro up vs dollar, yen before Fed, ECB, but investors wary

by on July 31, 2012 8:42 pm BST

Tue Jul 31, 2012 4:42pm EDT

* Nervous investors await ECB action after Draghi comments
    * Fed's two-day meeting begins
    * Options market show bias for euro puts
    * SNB reserves show lofty euro holdings

    By Julie Haviv
    NEW YORK, July 31 (Reuters) - The euro rose against the
dollar and yen on Tuesday as the Federal Reserve began a two-day
meeting, but muted expectations of what action the European
Central Bank will likely take later in the week kept investors
wary of aggressively buying the single currency.
    The ECB will meet on Thursday, the day after the U.S.
Federal Reserve ends its 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 since the bank's
president, Mario Draghi, said last week the ECB 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
    But sentiment has turned more cautious this week as the
policy decisions grow closer.
    "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 $1.2304, up 0.4 percent. It rose 0.3
percent against the yen, to 96.08 yen.
    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 2.8 percent
and 4.9 percent in value, respectively.
    Year-to-date, the euro is down 5 percent against the dollar
and 3.5 percent versus the 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."
    With much of the euro zone mired in a recession most believe
the euro's upside is limited, with investors likely to sell on
    The European Union reported that joblessness in the euro
zone hit its highest level in June since the single currency was
born. And Spain's central bank reported that capital flight from
the country, 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. 
    In the options market, demand remained firmly toward euro
puts, or the right to sell euros.
    Three-month risk reversals, a broad gauge of
currency market sentiment, rose to 2 percent on Tuesday, up from
 1.9 percent on Monday and 1.8 percent a week earlier. The bias
for euro puts, however, has improved somewhat from the beginning
of July when it was at 2.4 percent.
    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 78.14 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.
    "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.
    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.