Reuters: US Dollar Report: FOREX-Euro falls as weak data weighs before ECB meeting

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FOREX-Euro falls as weak data weighs before ECB meeting May 2nd 2012, 18:59 Wed May 2, 2012 2:59pm EDT * Euro zone data highlights region's vulnerability * Figures contrast with strong US factory data on Tues * Focus on ECB policy meeting By Julie Haviv NEW YORK, May 2 (Reuters) - The euro slumped for a third straight session against the dollar on Wednesday after dismal European manufacturing data added to fears about a broadening slowdown in the region ahead of a European Central Bank meeting and key elections in France and Greece. The euro came off its lows, however, on speculation the European Central Bank may provide euro zone banks with more liquidity in a third long-term refinancing operation after the euro zone data, in both indebted and core nations, confirmed a worsening economic outlook. Italy's manufacturing sector shrank more than expected, while data from Germany, Spain and France also showed factory activity falling significantly. Political uncertainty also looms large, with upcoming elections in France and Greece having the potential to push the euro below $1.30 in the coming weeks. The ECB on Thursday is likely to keep rates on hold, and provide further details of the European growth pact that may be announced at a summit in June, according Douglas Borthwick, managing director at Faros Trading in Stamford, Connecticut. "There may be a discussion by the ECB on adjusting haircuts on collateral it holds for LTRO funds, but I believe these discussions will come around the July meeting," he said. "[ECB President] Draghi is likely to stay hawkish on inflation." An ECB cash injection, or LTRO, would give low-cost liquidity to euro zone banks, a potential positive for the euro. The euro fell to $1.3121, its lowest in more than a week, though volumes were thin after the May Day holiday in Europe. The euro last traded at $1.3164, down 0.5 percent. "ECB hawkishness would be met by a stronger euro as it trades in this 1.3000/1.3300 range," Borthwick said. In the options market, there was reportedly heavy demand for downside protection in euro/dollar, lifting risk reversals, a key measure of currency sentiment, across the curve. There was strong demand for June $1.26 euro puts, one broker said. Investors who buy these puts expect the euro to fall below $1.26 before they expire June 8. Higher demand for euro puts, or bets the currency will depreciate, was evident in one-month risk reversals, which traded at -1.55 vols on Wednesday, from -1.50 vols the previous session. Three-month risk reversals were at -2.325 vols versus -2.3 vols on Tuesday. While the ECB is widely forecast to keep interest rates unchanged, expectations are rising it may soon cut borrowing costs, eroding the euro's rate advantage. "Despite liquidity provisions from the ECB, the data shows that the long-term fundamental picture in the euro zone remains negative," said Brian Kim, currency strategist at Royal Bank of Scotland in Stamford, Connecticut. "The weakness seems to be across the board." The euro also hit a two-week low against the safe-haven yen, dropping to 105.11 yen, and a 22-month low against the British pound, weighed down by data showing the euro zone labor market continued to worsen. The euro also briefly trimmed losses after weaker-than-expected U.S. private sector jobs data. The dollar was last at 80.16 yen, up 0.1 percent and off a 2-1/2-month low of 79.640 yen hit on Tuesday. Link this Share this Digg this Email Reprints

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