Reuters: US Dollar Report: FOREX-Euro rallies on ECB rate decision and Draghi but fears linger

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FOREX-Euro rallies on ECB rate decision and Draghi but fears linger Jun 6th 2012, 19:21 Wed Jun 6, 2012 3:21pm EDT * Euro up vs dollar after ECB decision and Draghi * ECB leaves growth outlook unchanged * Options market shows demand for euro puts By Julie Haviv NEW YORK, June 6 (Reuters) - The euro rallied smartly against the dollar and yen in choppy trading on Wednesday after the European Central Bank left both interest rates and the outlook for economic growth unchanged. While investors in other markets would have welcomed further ECB action, a cut in rates or further monetary stimulus would have been negative for the euro, which also was ripe for a bounce given overextended positioning against the currency. The ECB held its main interest rate at 1.0 percent on Wednesday, resisting international pressure to provide more support for the ailing euro zone economy. Investors also shrugged off comments from ECB President Mario Draghi, who put the onus on European political leaders to resolve the debt crisis. "Lack of negative news overnight and from Draghi prompted a short squeeze," said Michael Woolfolk, senior currency strategist at BNY Mellon. The euro was up 0.8 percent against the dollar at $1.2546, well above a near two-year low of $1.2286 plumbed on Friday. The euro traded as high as $1.2574, the highest level since May 29, and as low as $1.2438. To be sure, the euro's strength did little to diminish demand for puts, or bets on a euro decline, in the options market, according Matthew Schilling, a commodities broker at RJO Futures in Chicago. "There has been heavy volume all the way down to $1.1750 and even with this bounce and (ECB) rates staying unchanged there is not a lot of demand for calls." Investors who buy these puts expect the euro to fall below $1.1750 before they expire on July 6. "It doesn't look like anyone believes anything positive will come out of the euro zone," he said. Spanish banking sector problems and the possibility of Greece leaving the euro zone had some investors expecting the ECB to reassure investors by announcing fresh measures. Draghi, however, ruled out further long-term refinancing operations to boost liquidity, said Ron Simpson, director of FX research at Action Economics in Tampa, Florida, "and basically throws the onus back to politicians by saying it isn't right for monetary policy to fill 'other actors' lack of action.' "It appears no more Band-Aids are forthcoming from the central bank," he said. But Draghi did say the ECB decided to continue conducting its main refinancing operations at fixed-rate tender procedures with full allotment for as long as necessary. The ECB's decision comes a day after Group of Seven finance ministers took no immediate steps to soothe fears over Europe's debt problems but did discuss policy responses. Also on Wednesday, the president of the Atlanta Federal Reserve Bank, Dennis Lockhart, said the U.S. central bank may need to consider additional monetary easing. His comments come before U.S. Fed Chairman Ben Bernanke's testimony on Thursday to Congress on the economy. Hints on the possibility of more quantitative easing are seen as key. SPAIN WORRIES Against the yen, the euro rose 1.4 percent to 99.38 yen , well off Friday's trough, which was the lowest level since December 2000. Despite the euro's bounce, its prospects still look bleak. Germany and European Union officials are urgently exploring ways to rescue Spain's debt-stricken banks, although Madrid has not yet requested assistance and is resisting political conditions, EU sources said on Wednesday. There is also a risk that Greek elections on June 17 could lead to Greece leaving the euro. Link this Share this Digg this Email Reprints

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