Reuters: US Dollar Report: FOREX-Euro falls but talk of Fed easing caps downside

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FOREX-Euro falls but talk of Fed easing caps downside Sep 10th 2012, 15:30 Mon Sep 10, 2012 11:30am EDT * Euro edges lower vs dollar after Friday's rally * Fed monetary easing speculation weighs on dollar * Investors await Dutch election, German court ruling NEW YORK, Sept 10 (Reuters) - The euro fell against the dollar on Monday ahead of a Federal Reserve policy meeting this week, with expectations high that the U.S. central bank could announce another round of stimulus. Despite Monday's losses, the euro remained close to an almost four-month high touched on Friday, when disappointing U.S. jobs data fanned speculation the Fed may launch another round of quantitative easing this week. Under the QE program, the Fed prints money to buy bonds, which depresses Treasury yields, encouraging investors to seek higher returns elsewhere. An increase in the money supply erodes the value of the dollar. "Risks continue to loom large this week but we would suggest the most significant event for the euro will be the FOMC meeting on Thursday," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto. The Fed will announce its rate decision and issue a policy statement at the close of the two-day meeting of its Federal Open Market Committee on Thursday. The euro on Monday was down 0.1 percent at $1.2795, still near Friday's high of $1.2817, which was its strongest level since May. Sentiment toward the common currency improved after the European Central Bank last week unveiled a plan to cut borrowing costs for its most indebted countries. But analysts cautioned that with Dutch elections and a German constitutional court ruling on the euro zone permanent bailout fund also due this week, investors would be wary of pushing the currency much higher. Westpac said in a note the euro may rise to $1.30 in the near term after last week's soft U.S. jobs report bolstered expectations of more easing by the Fed. Westpac also said risks around the German constitutional court's pending decision on whether the rescue fund can go ahead were exaggerated. It expected a favorable ruling on the fund, albeit with restrictions. Dutch election risks were also waning as recent polls showed a tilt back toward pro-European parties, all of which could see the euro target $1.33-1.34, it added. Even so, analysts said the currency remained vulnerable to developments in Spain, which may have to ask for a bailout, and Greece, whose foreign lenders rejected parts of an austerity package prepared by the government. Greece acknowledged on Monday it was having trouble persuading foreign lenders to accept a plan to save nearly 12 billion euros over two years, essential to unlocking aid payments the country needs to avoid bankruptcy.. DOLLAR UNDER PRESSURE Expectations for a third round of quantitative easing by the Fed were also likely to support riskier currencies like the Australian dollar in coming days, traders said. In a Reuters poll taken after Friday's jobs report, economists saw a 60 percent chance of the Fed embarking on QE3 this week compared with 45 percent in a late August poll. More stimulus from the Fed would make it attractive for investors to use the dollar as a funding currency to buy higher-yielding assets in carry trades. Expectations of Fed easing have helped the Australian dollar, which hit a two-week high on Friday, but weak Chinese trade data put it under some pressure on Monday. The Australian currency was last down 0.2 percent at $1.0362 after data showed a surprising year-on-year drop in China's imports in August. The Aussie dollar tends to be sensitive to economic data from China, Australia's biggest export market. Against the yen, the U.S. dollar was steady at 78.28 yen , near a one-month low touched on Friday. Analysts said Japanese authorities may start stepping up their rhetoric against the yen's rise if the dollar drops below the early August low of 77.90 yen. There was also a risk the Bank of Japan could ease policy when it next meets to neutralize some of the impact from possible action by the Fed. Either move would be negative for the yen. "We remain of the view that in the current more favorable market environment and on a risk-reward basis, building long dollar/yen positions on pull-back close to the 78.00 mark is an appealing strategy," BMO Capital Markets said in a note. Link this Share this Digg this Email Reprints

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