Reuters: US Dollar Report: FOREX-Euro firmer vs dollar; Aussie rises on stimulus hopes

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FOREX-Euro firmer vs dollar; Aussie rises on stimulus hopes Jul 31st 2012, 06:05 Tue Jul 31, 2012 2:05am EDT * Euro edges up vs dollar but below recent 3-week high * Aussie dollar still strong on European stimulus hopes * Focus on this week's ECB policy decision By Ian Chua and Masayuki Kitano SYDNEY/SINGAPORE, July 31 (Reuters) - The euro edged higher against the dollar on Tuesday but stayed off a recent three-week high, while the Australian dollar hit a four-month high, supported by expectations that major central banks may add more stimulus. The single currency moved up 0.1 percent from late U.S. trade on Monday to $1.2274, but remained stuck below the high of $1.2390 hit last Friday. The focus is on the European Central Bank's policy meeting on Thursday, after ECB President Mario Draghi pledged last week to do whatever was necessary to protect the euro zone from collapse. "I think there are more options on the table than we can think of right now. There's a lot of anticipation after Draghi's comments," said Jesper Bargmann, Asia head of G11 spot FX for RBS in Singapore. "The market seems to think that there are going to be some strong measures and this should boost the commodity currencies and some of the emerging market currencies," he said. A popular trade has been to short the euro against the Australian dollar, New Zealand dollar and some emerging market currencies, Bargmann added. Draghi's remarks last week have stirred market expectations that the ECB may soon reactivate its bond-buying programme to help cut Spanish and Italian borrowing costs. "The most significant possible measure would be for the ECB to buy bonds and to leave such purchases unsterilised, but I don't think such steps can be taken as they are likely to meet German opposition," said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore. Last week, the ECB bought no government bonds via its Securities Markets Programme (SMP) for a 20th straight week and it has barely conducted such purchases this year, even as rising borrowing costs in Spain fuelled jitters Madrid may eventually need a full-blown sovereign bailout. When the ECB bought government bonds in the past, it offset, or sterilised, its purchases by draining equal amounts of liquidity from the banking system to avoid stoking inflation. The ECB probably won't go so far as to deviate from this convention, SMBC's Okagawa said. "At the same time, with market expectations running high, they can't afford to do nothing. They raised the bar high on their own," he added. In any event, traders and analysts are sceptical that ECB bond-buying by itself would be enough to change the euro's weak overall trend. "It is a short-term relief, but it is not like people are going to invest in Europe suddenly for that reason," said Bargmann at RBS. "We've already seen some serious diversification, not just out of the periphery but out of Europe altogether and these are longer term decisions and they are not going to turn around in the short-term," Bargmann said, referring to a shift in asset allocation by central bank reserve managers out of the euro. AUSTRALIAN DOLLAR The euro eased 0.2 percent against the high-flying Australian dollar to A$1.1656, after having hit a record low around A$1.1646 the previous day. The Aussie and other high-beta currencies, which are relatively volatile and tend to benefit when investor optimism about the outlook for the global economy picks up, have been among the best performers recently. Such currencies have gotten a lift from market expectations that both the ECB and Federal Reserve are closer to providing more aid for their respective economies. The Aussie rose 0.3 percent to $1.0526, having hit a four-month high of $1.0538 earlier on Tuesday. The modest rise in the euro weighed on the dollar index, which measures the greenback's value against a basket of major currencies. The dollar index stood at 82.749, holding near a three-week low of 82.343 hit last week. Against the yen, the dollar edged up 0.1 percent to 78.26 yen. While the Fed is seen likely to hold off from adopting another bond-buying programme at its two-day policy meeting that starts on Tuesday, some market players think the U.S. central bank might adopt such monetary stimulus in coming months. Link this Share this Digg this Email Reprints

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