Reuters: US Dollar Report: FOREX-Euro recovers as Draghi dampens easing hopes

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FOREX-Euro recovers as Draghi dampens easing hopes May 3rd 2012, 16:23 Thu May 3, 2012 12:23pm EDT * ECB's Draghi says inflation to stay above 2 pct in 2012 * U.S. jobless claims fall, services sector slows * EUR/USD volatility falls, but supported ahead of US jobs By Gertrude Chavez-Dreyfuss NEW YORK, May 3 (Reuters) - The euro on Thursday rose against the yen and rallied from two-week lows to trade near flat versus the U.S. dollar after European Central Bank chief Mario Draghi gave a more upbeat assessment of the euro zone economy than expected, reducing expectations for further monetary easing. But gains by the euro could be short-lived ahead of elections in France and Greece at the weekend. In comments made after the ECB kept rates unchanged at 1 percent, Draghi said the euro zone economy was likely to recover this year, although the outlook remained vulnerable to downside risks. He also said that inflation was likely to remain above 2 percent this year. "Mario Draghi surprised the currency market by assuming a decidedly hawkish posture at the monthly ECB press conference dismissing any speculation of an imminent rate cut or even an additional LTRO," said Boris Schlossberg, director of GFT in Jersey City, referring to money borrowed from the ECB known as long-term refinancing operations. The euro hit session highs at $1.3180 after earlier falling to two-week lows at $1.3097. It was last trading at $1.3145, flat on the day. Traders said investors holding short euro positions got squeezed when Draghi failed to signal further easing or outline measures to boost what many believe was still a struggling euro zone economy. Markets have become increasingly concerned that the ECB's no-action stance on Thursday could have negative consequences on a euro zone economy that has been hit by a slew of poor economic data not only from the smaller economies, but from the core countries as well. Technical charts, however, showed that the euro was still in a consolidation pattern. A breakout from $1.2994-$1.3282 range is needed for a clearer near-term outlook. On the upside, a break of $1.3283 - the high hit on May 1 - will indicate that the consolidation from the Feb. 29 peak of $1.3486 has been completed and a rebound from this year's low of $1.2624 is resuming, analysts said. The euro also rose 0.2 percent against the Japanese yen to 105.61 yen. In the options market, one-month at-the-money implied volatility in euro/dollar fell to 8.65 percent from 9.05 percent previously after the ECB failed to discuss a rate cut at Thursday's meeting. Volatility had risen, as high as 9.25 percent on Wednesday in the run-up to the ECB gathering as market participants had priced in a more dovish statement. Volatility, however, should remain underpinned ahead of the French and Greek elections as well as the U.S. non-farm payrolls report for April. Traders said support is seen around 7.98 percent, the four-year low hit last Friday. The euro zone common currency came under pressure earlier in the European session when Spain sold 2.5 billion euros of three- and five-year bonds to solid demand, but yields jumped compared with previous auctions. It was the first test of market appetite for Spanish debt since the country slipped into recession and had its credit rating cut again. The more immediate risk for the euro, however, comes from the French and Greek elections. Opinion polls showed socialist Francois Hollande will be elected the next French president and history suggests with that victory comes a left-wing parliament. Analysts said that could be a negative for the euro. . In Greece, surveys showed no clear winner emerging from the elections, with the two main parties garnering barely enough seats for a parliamentary majority. The dollar, meanwhile, rose 0.3 percent against the yen to 80.36 yen, supported in earlier trade by a fall in weekly U.S. jobless claims that eased concerns about the labor market recovery. The greenback, however, pared gains against the Japanese currency after a survey showed growth in the U.S. services sector slowed in April as new orders dropped. The Institute for Supply Management reported that its non-manufacturing index for April fell to 53.5 from 56.0 the previous month. The April figure was also lower than the market's consensus for a reading of 55.5. Peter Buchanan, economist at CIBC World Markets in Toronto, said the ISM report eroded some of the positive sentiment from the earlier U.S. jobless claims data. "Although all the components remain in the expansionary territory, today's readings point potentially to a modest slowing in services sector growth," he said. Link this Share this Digg this Email Reprints

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