Reuters: US Dollar Report: FOREX-ECB rate move on horizon, euro gains on greenback

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FOREX-ECB rate move on horizon, euro gains on greenback Jul 3rd 2012, 19:11 Tue Jul 3, 2012 3:11pm EDT * Euro climbs higher after being mostly lower * Trading light ahead of Fourth of July holiday in U.S. * Aussie steady; RBA leaves rates on hold NEW YORK, July 3 (Reuters) - The euro rose against the dollar on Tuesday in pre-U.S. holiday trade as investors positioned for a European Central Bank policy meeting on Thursday. Activity was relatively light, exacerbating price moves, ahead of the U.S. Fourth of July holiday on Wednesday, traders said, with a report by one trader that buying from the Middle East was responsible for the last tick higher. "It's thin illiquid market conditions and the prevailing view is that we have a more risk-on environment," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. "There are no technical levels and we don't see any headline risk." The euro was last up 0.17 percent at $1.2606, closer to the session peak of $1.2627 than the session low of $1.2557 but well below a peak touched on Friday in the wake of an EU summit agreement, the latest attempt to stem the ongoing crisis. The move was not expected to be sustained, as most investors are betting that the European Central Bank will cut its benchmark interest rate amid poor euro zone data and doubts about a European plan to support indebted euro zone countries. Signs from the euro zone were generally discouraging, keeping sentiment toward the euro bearish. The jobless rate rose to a record in May and factory activity contracted again in June. That overshadowed any optimism remaining from an announcement last week that euro zone leaders agreed that rescue funds could be used to stabilize bond markets without forcing countries that comply with EU budget rules to adopt extra austerity measures or economic reforms. Finland and the Netherlands, two of the currency bloc's most hard-line creditor states, had already cast doubt on the measures on Monday. "This week's key event for the euro remains the ECB meeting on Thursday, where expectations are for a 25-basis-point cut in the policy rate to 0.75 percent," said Eric Theoret, currency strategist at Scotiabank in Toronto. "While a rate cut had been discussed at the last meeting, a majority of the governing council had voted to maintain rates. It has since been rumored that a majority now favors easing rates." The U.S. dollar rose 0.49 percent and bought 79.87 yen . Traders said dollar buying by model funds was offset to a limited extent by Asian retail accounts' selling. ECB AWAITED Lower rates reduce the attractiveness of interest-bearing securities denominated in a particular currency and so reduce demand for the currency to buy them. Against the safe-haven yen, the euro was up 0.71 percent at 100.69 yen, trending closer to post-summit highs above 101.00 yen. Many traders expect the ECB to move on Thursday to bolster the euro zone economy by cutting its main refinancing rate. Jaco Rouw, fund manager at ING Investment Management in London, said there were differing opinions as to the impact of any rate cut, but he expects the euro to weaken given the poor economic outlook for the currency bloc. "One opinion is that the rate cut might boost risk sentiment and reduce the risk premium in the euro, which could be positive, but a lower rate in itself would be euro negative," he said. "In the longer term, based on economic developments, there is still room for more monetary easing in Europe, so we would position for a weaker euro." Some also expect the Federal Reserve to announce a third round of asset purchases, dubbed QE3, perhaps as soon as the U.S. central bank's next policy meeting from July 31 to Aug. 1. Australia's central bank held its main cash rate steady at 3.5 percent on Tuesday, to continue to gauge the effect of back-to-back cuts. The Australian dollar was up 0.32 percent at $1.0281, close to a two-month high touched earlier in the session. "The decision to leave rates unchanged was a direct reflection of two factors - first, a significant pick-up in asset market conditions following signs of progress in Europe and second, a significant improvement in Australian economic data and growth in excess of the RBA's expectations," wrote Andrew Cox, G10 FX strategist at Citigroup in New York. Cox added that a short position for the euro against the Aussie still holds appeal given two conditions persist. "First, continued signs of stabilization in Asian economic data and second, low levels of European specific systemic risk." Link this Share this Digg this Email Reprints

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