Reuters: US Dollar Report: FOREX-Euro falls first time in 4 days but Fed could limit downside

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FOREX-Euro falls first time in 4 days but Fed could limit downside Sep 10th 2012, 20:13 Mon Sep 10, 2012 4:13pm EDT * Euro edges lower vs dollar after Friday's rally * Fed monetary easing speculation weighs on dollar * Investors await Dutch election, German court ruling By Julie Haviv NEW YORK, Sept 10 (Reuters) - The euro dropped against the dollar for the first time in four days o n M onday, a direction that could prove to be transitory given elevated expectations that the U.S. Federal Reserve will unveil new stimulus measures to bolster the economy this week. The euro rallied last week to hit an almost four-month high on Friday, when disappointing U.S. jobs data spurred speculation the Fed would launch a third round of quantitative easing, or QE3, at the conclusion of its two-day meeting on Thursday. Under the QE program, the Fed prints money to buy bonds, which depresses Treasury yields, with the goal of encouraging investors to seek higher returns elsewhere. An increase in the money supply erodes the value of the dollar. "The Federal Reserve is gearing up to ease and the only question is how far will they go," said Kathy Lien, managing director at BK Asset Management in New York. "How far they will go will depend on how aggressive they want to be. But either way, we don't expect the central bank to stand by idly and do nothing this week just because of the U.S. elections." Lien said she expects the Federal Open Market Committee, the Fed's policymaking arm, to alter the rate guidance language of its statement and extend its low rate pledge from 2014 to 2015. Low interest rates for longer than anticipated should also weigh on the dollar, making it a funding currency for buying higher-yielding assets. The euro last traded down 0.4 percent at $1.2758, below Friday's peak of $1.2817, which was its highest level since May. Sentiment, however, toward the single currency shared by 17 countries has improved markedly as a result of the European Central Bank last week unveiling 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 will be wary of buying the currency. 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 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 Aussie dollar tends to be sensitive to economic data from China, Australia's biggest export market. Against the yen, the U.S. dollar last traded up 0.1 percent at 78.28 yen, just above a one-month low of 78.00 yen hit 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 Federal Reserve. "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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