FOREX-Euro firmer vs dollar; Aussie up on stimulus hopes

by on July 31, 2012 4:24 am BST

Tue Jul 31, 2012 12:24am EDT

* Euro edges up vs dollar but below recent 3-week high

* Euro zone data dismal, businesses more pessimistic

* Aussie still strong on European stimulus hopes

By Ian Chua and Masayuki Kitano

SYDNEY/SINGAPORE, July 31 (Reuters) – The euro edged higher
against the dollar on Tuesday but stayed off a recent three-week
high, while the Australian dollar hit a four-month high,
supported by expectations that major central banks may add more

The single currency moved up 0.2 percent from late U.S.
trade on Monday to $1.2288, but remained stuck below the
high of $1.2390 hit last Friday.

Data on Monday added to the urgency for policymakers to act
with economic sentiment in the euro zone falling to near a
3-year low as the bloc’s economy deepened its slump and
businesses became more pessimistic.

“There’s mounting hopes surrounding the European Central
Bank interest rate decision,” said David Song, currency analyst
in New York at DailyFX.

On Thursday, the ECB’s governing council may “lean towards a
zero interest rate policy as the region heads for a prolonged
recession,” Song said, adding “The central bank may have little
choice but to implement a range of tools over the coming months
as the outlook for growth and inflation falter.”

Market expectations for the ECB to take fresh action to help
quell the region’s sovereign debt crisis rose after President
Mario Draghi pledged last week to do whatever was necessary to
protect the euro zone from collapse.

“The most significant possible measure would be for the ECB
to buy bonds and to leave such purchases unsterilised, but I
don’t think such steps can be taken as they are likely to meet
German opposition,” said Satoshi Okagawa, senior global markets
analyst for Sumitomo Mitsui Banking Corporation in Singapore.

Last week, the ECB bought no government bonds via its
Securities Markets Programme (SMP) for a20th straight week and
it has barely conducted such purchases this year, even as rising
borrowing costs in Spain fuelled jitters Madrid may eventually
need a full-blown sovereign bailout.

When the ECB bought government bonds in the past, it offset,
or sterilised, its purchases by draining equal amounts of
liquidity from the banking system to avoid stoking inflation.

The ECB probably won’t go so far as to deviate from this
convention, SMBC’s Okagawa said.

“At the same time, with market expectations running high,
they can’t afford to do nothing. They raised the bar high on
their own,” he added.

In any event, analysts say ECB bond-buying by itself will
not resolve the fiscal issues of indebted countries such as
Spain, and is unlikely to change the euro’s weak overall trend.


The euro eased 0.1 percent against the high-flying
Australian dollar to A$1.1666, after having hit a
record low around A$1.1646 the previous day.

The Aussie and other high-beta currencies, which are
relatively volatile and tend to benefit when investor optimism
about the outlook for the global economy picks up, have been
among the best performers recently.

Such currencies have gotten a lift from market expectations
that both the ECB and Federal Reserve are closer to providing
more aid for their respective economies.

The Aussie rose 0.4 percent to $1.0532, having hit
a four-month high of $1.0537 earlier on Tuesday.

The modest rise in the euro weighed on the dollar index,
which measures the greenback’s value against a basket of major
currencies. The dollar index eased 0.2 percent to 82.664.

Against the yen, the dollar edged up 0.1 percent to 78.20

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.