Reuters: US Dollar Report: FOREX-Euro slips as economy struggles, ECB awaited

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FOREX-Euro slips as economy struggles, ECB awaited Jul 4th 2012, 08:36 Wed Jul 4, 2012 4:36am EDT * ECB rate cut expectations to keep euro subdued * Trading light due to U.S. holiday * Aussie retreats after hitting two-month highs * Euro falls to 16-month low vs Swedish crown By Anirban Nag LONDON, July 4 (Reuters) - The euro slipped against the dollar and the yen on Wednesday as grim economic data strengthened expectations the European Central Bank is about to cut interest rates, while growth-linked currencies took a breather from a recent rally. The euro was also lower on bond redemption-related selling, with some investors on the sidelines given a U.S. market holiday that kept volumes on the low side, traders said. The euro dipped 0.2 percent to $1.2585, still holding above Tuesday's low of $1.2559. Immediate resistance loomed at $1.2693, a high reached last Friday after European leaders hammered out a deal to tackle the region's debt crisis. "The market looks primed for a 25 basis point cut by the ECB, but something more like a liquidity injection would be needed to lift the euro," said Paul Rob son, currency strategist at RBS. "Investors will also want to see if the ECB President will highlight downside risks to growth and inflation, which will set the ground for more easing." Pressure on the ECB to ease policy has gathered pace as the region's economic slowdown has deepened on the back of tight credit conditions that are providing strong headwinds to growth amid fiscal tightening and austerity. Near-term inflation pressures have also eased following a sharp drop in energy prices over the last couple of months, giving extra scope for a rate cut. Data on Wednesday showed Germany's services sector unexpectedly stagnated in June. And while a contraction in France's services sector eased, business expectations slumped to their lowest in three years, underlining how bleak conditions in Europe are. Analysts said that, while a slew of measures to support growth from the ECB could help the euro, given that investors have significantly large bearish positions, any disappointment could see the euro come under fresh pressure and bring the June 28 low of $1.2407 back into focus. BOND REDEMPTIONS Currency dealers said Japanese investors received principal on redeemed euro zone bonds which was swiftly converted to yen. That pushed the euro 0.25 percent lower against the yen to 100.36. "Euro/yen and dollar/yen dipped in the morning on bond redemption flows. Using that opportunity, I sold dollar/yen, but have since closed my positions in both pairs and I'm taking a wait-and-see stance ahead of the ECB tomorrow," said a trader for a major Japanese bank. A string of weak data out of the United States and Europe has spurred expectations of more stimulus from both the ECB and the Federal Reserve. This has encouraged the market to use the euro and U.S. dollar as funding currencies for carry trades, traders said. While easing global monetary conditions should bolster risk appetite and could lend some support to the euro, it is likely to underperform the growth-linked currencies as a lower interest rate would be euro-negative. Underscoring that the euro fell to a 4-1/2 month low against the Australian dollar around A$1.2211. The risk-sensitive Aussie was slightly lower against the U.S. dollar at $1.0262, having reached two-month highs at $1.0371 on stronger-than-expected Australian retail sales data. The euro also fell against the Swedish crown after the Riksbank kept interest rates unchanged at 1.5 percent as expected. Despite risks from the euro zone, it only slightly trimmed expectations for future base borrowing costs. The euro fell to a 16-month low of 8.7090 crowns from around 8.7450 before the rate decision was announced. Link this Share this Digg this Email Reprints

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