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 sessions. 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, Connecticut. "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 strength. 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. SNB EURO HOLDINGS COULD PORTEND WEAKNESS 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.