Fri Jul 27, 2012 5:41am EDT
* Bundesbank position leads to euro sell-off
* Draghi inspired euro gains appear to fizzle
* Traders awaiting U.S. Q2 GDP data
By Michael Szabo
LONDON, July 27 (Reuters) – The euro fell on Friday,
retreating from a two-week high against the dollar, as investors
sold into its recent rally on fresh doubts about whether the
European Central Bank would take bold measures to tackle the
sovereign debt crisis.
A pledge by ECB President Mario Draghi on Thursday to do
whatever it takes within the bank’s mandate to preserve the
euro, had propelled the common currency to a two-week high of
Analysts said Draghi’s comments sent a strong signal that
the ECB could take steps to rein in soaring Spanish and Italian
borrowing costs. It has previously bought government bonds in
the secondary market to help push yields down.
But the German Bundesbank said on Friday it remained
critical of the ECB’s bond-buying programme, triggering a
selloff in the euro and European shares and a rise in euro zone
peripheral bond yields.
The euro fell to a session low of $1.2241 on trading
platform EBS, down 0.2 percent on the day, but holding well
above this week’s two-year low of $1.2042. Traders cited offers
to sell the euro at $1.2320/30 with stop-loss orders above
“It suggests we saw a bit of an overreaction to Draghi’s
comments yesterday,” said Adam Cole, global head of FX strategy
“The market overinterpreted what he said and he didn’t need
to be taken that literally, so we think it’s very unlikely that
the ECB is ready to reintroduce regular bond buying operations
or induce any other policy change beyond cutting interest rates
for the time being.”
The ECB earlier this month cut interest rates to support
economic growth, but pressure is building on it to do more given
peripheral euro zone governments are struggling to implement
tough austerity measures. It holds a policy meeting next week.
The ECB has bought 211.5 billion euros worth of government
bonds since the programme began in May 2010.
Analysts said that purchases between August and December
last year had initially lowered borrowing costs but that
long-term yields began climbing again in November, putting
pressure on the euro.
“I can’t imagine Draghi would have made his comments without
some sort of nod that temporary measures could be made, but this
does not add up to solving the euro zone’s problems, so I think
the peak has already been seen,” said Neil Mellor, currency
strategist at Bank of New York Mellon.
As such, investors will be watching the ECB meeting next
Thursday to see if the central bank follows up Draghi’s words
with any plan of action.
The market will watch U.S. economic output data to be
published at 1230 GMT. The median of forecasts from analysts
polled by Reuters is for growth of 1.5 percent in the second
quarter, down from the first-quarter’s 1.9 percent expansion.
Strategists said although a weaker-than-expected GDP figure
may raise expectations that the Federal Reserve could adopt
further monetary easing steps at its meeting next week,
potentially sending the euro back above $1.23, a stronger figure
wouldn’t necessarily strengthen the dollar.
“It’s highly unlikely even a strong print on GDP — which
would be out of the blue — would really change the picture,”
said Andrew Wilkinson, chief economic strategist at Miller Tabak
& Co. in New York.
“We know already the quarter was weak, so what’s more
important now is the forward-looking perspective. Even if there
were signs of ECB action, it would not necessarily change the
Fed’s course going forward. The Fed stands very little chance of
achieving its goals on employment without further stimulus.”
The Fed might eventually opt for a third round of
quantitative easing in the form of large-scale bond purchases,
known as QE3, or cut the interest rate it pays banks on the
excess reserves they leave with the central bank.
The dollar was slightly lower against the yen,
trading at 78.10 yen. The euro eased against the Japanese yen
, falling to 95.75 yen, but still above a 12-year low
of 94.12 yen touched on Tuesday.