Reuters: US Dollar Report: FOREX-Euro climbs, but gains seen limited before ECB

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FOREX-Euro climbs, but gains seen limited before ECB Jul 31st 2012, 12:12 Tue Jul 31, 2012 8:12am EDT * Nervous investors await ECB action after Draghi comments * Aussie hits record high vs euro, 4-mth high vs dollar * Focus on this week's ECB and Fed meetings By Michael Szabo LONDON, July 31 (Reuters) - The euro inched up against the dollar on Tuesday on month-end demand, but stayed below three-week highs on doubts the European Central Bank can meet market expectations of bold steps to combat the debt crisis. Expectations that the ECB may lower interest rates in the near term saw the euro hit a record low against the higher-yielding Australian dollar. The Aussie was also buoyed by comments from Chinese premier Wen Jiabao that China would fine-tune policy to support economic growth. The single currency was up 0.2 percent against the dollar to $1.2280, but well below the high of $1.2390 hit last Friday. Traders said the euro moved higher due to buying by sovereign investors in the euro/sterling and euro/Swiss franc currency pairs, probably to meet month-end requirements. That led to some to pare bets on euro weakness. Traders cited strong offers to sell the currency above $1.2300 while bids were layered below $1.2250 and stop losses at $1.2220. Investors are focused on Thursday's ECB policy meeting after bank chief Mario Draghi pledged last week to do whatever was necessary to preserve the euro. That raised expectations of a bold ECB response, a move that could boost the currency. But investors are increasingly questioning how much the ECB can deliver, given euro zone paymaster Germany is opposed to the central bank buying government bonds in the secondary market and granting a banking licence to the bloc's rescue fund. "There is a clear danger that expectations might be too high...He's got to put his money where his mouth is, as there is a risk of disappointment around Thursday," said Nick Parsons, head of markets strategy at nabCapital in London. If the ECB does not signal further measures, the euro could fall back below $1.2130, he said, but a firm response could lift it above last week's peak. "After that you'd really be looking at $1.2693, the high on the last trading day of June, but we'd really need to see monetary shock and awe to take to us to those sorts of levels," Parsons added. Such shock is unlikely with most traders and analysts sceptical that a resumption of ECB bond-buying by itself would be enough to change the euro's weak overall trend. Expectations of further ECB interest rate cuts would keep sentiment towards the currency negative, analysts said. Earlier this month, the ECB cut its deposit rate, at which banks park excess funds with the bank, to zero, making the euro a funding currency for investors seeking higher yields. FX DIVERSIFICATION Since the rate cut, analysts said a popular trade has been to sell the euro against the higher-yielding Australian dollar. The euro fell to a record low of A$1.1645 on Tuesday. Analysts said long term investors like central banks have also increased holdings of high-yielding currencies, especially at the expense of the euro and that could be one reason why the Australian dollar has been in demand. The Aussie hit a four-month high against the U.S. dollar at $1.0539. The Swiss National Bank which has been defending the 1.20 franc per euro peg since last September by buying the common currency, on Tuesday published data on its foreign exchange reserves, showing a second quarter increase in euros as well as in "other" currencies. Expectations are the euros will soon be sold in favour of other currencies. "With an estimated 184 billion euros still on its balance sheet, continued future offloading of euros could have a meaningful impact on euro crosses," said Geoffrey Kendrick, currency analyst at Nomura. The "other" currencies in the SNB portfolio refers to commodity and emerging market currencies. These growth-linked currencies also tend to benefit when optimism about the outlook for the global economy picks up. While the U.S. Federal Reserve is likely to hold off from adopting another bond-buying programme at its two-day policy meeting that starts later in the session, some players think it might adopt such monetary stimulus in coming months. Investors will also eye Chicago PMI data for July, house prices for May and personal income and spending for June. The dollar edged up 0.1 percent to 78.18 yen. Link this Share this Digg this Email Reprints

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