Reuters: US Dollar Report: FOREX-Euro supported by Fed easing bets, seen vulnerable

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FOREX-Euro supported by Fed easing bets, seen vulnerable Jun 20th 2012, 08:30 Wed Jun 20, 2012 4:30am EDT * Euro steady vs dollar on Fed easing speculation * Greece seen closer to agreeing coalition govt * Euro resistance at $1.2748, post-election high By Nia Williams LONDON, June 20 (Reuters) - The euro steadied versus the dollar on Wednesday, holding gains made on speculation the U.S. Federal Reserve will adopt further monetary stimulus, although the risk of those expectations being disappointed left the common currency vulnerable. The euro also gained some support from signs that Greek parties may be close to forming a coalition government. Strategists said the Fed's policy decision due later on Wednesday would take centre stage and the common currency could be rangebound between $1.26 and $1.2750 in the run up to it. The euro was last down 0.1 percent at $1.2674, within sight of a one-month high of $1.2748 hit on Monday after a narrow win for pro-bailout parties in the Greek election. It clung on to much of the 0.9 percent gain made against a broadly softer dollar on Tuesday. "The weakness in the dollar is understandable but once that speculation is out of the way, and we know what the Fed are going to do, concerns about the euro zone will come back to the fore," said Simon Derrick, head of currency research at Bank of New York Mellon. "You wouldn't want to hold euros on a long-term basis." Signs that the euro zone debt crisis is intensifying - through political uncertainty in Greece, weakening German economic indicators and rising Spanish bond yields - have prompted some market players to bet central banks will step in with measures to safeguard global growth. Many market players doubt that the Fed will go so far as to launch another round of quantitative easing, a policy that entails the expansion of its balance sheet via bond purchases. But there might still be some disappointment if the Fed holds off from such stimulus. A more likely scenario is for the Fed to extend "Operation Twist", a programme aimed at pushing down long-term borrowing costs by selling short-term securities to buy longer-term ones. The scheme is now due to end in June. If all the Fed does is to extend "Operation Twist", the dollar could recover, said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong. "There is some, perhaps in our view misplaced, hope for QE3 today. We believe the Fed will probably extend its Operation Twist, but think QE3 seems unlikely at this stage," Kotecha said. "So that could provoke a bit of disappointment if that is the case." The dollar was steady against a basket of currencies at 81.437, near a one-month low of 81.186 hit on Tuesday. PERIPHERAL DEBT PRESSURED With Spain's 10-year government bond yields having hit euro-era highs this week, fanning speculation that Spain may need a full-blown bailout, market players expected any further euro gains to be limited. One idea that might help curb rises in Spain's borrowing costs is an Italian proposal, put forward at a G20 summit on Tuesday, for the euro zone's rescue funds to start buying the debt of distressed European countries. The proposal is expected to be discussed at a meeting of European leaders on Friday. The euro could see a short-covering bounce if the proposal is implemented although a sustained rise is unlikely, said a trader for a major Japanese bank in Singapore. "It probably won't be seen as a step that provides any fundamental solution, and it might just give people a good selling opportunity," the trader said. The euro edged 0.2 percent lower against the safe-haven yen , to 99.94 yen, while the dollar also slipped against the Japanese currency to 78.85 yen. The Australian dollar dipped 0.1 percent versus the greenback to $1.0179, holding close to a six-week high of US$1.0202 hit on Tuesday as investors bet more Fed stimulus would boost growth-linked currencies. Link this Share this Digg this Email Reprints

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