Reuters: US Dollar Report: FOREX-Euro weakens on worries about ECB bond buys

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FOREX-Euro weakens on worries about ECB bond buys Sep 4th 2012, 18:34 Tue Sep 4, 2012 2:34pm EDT * Euro lower but supported by expectations of bold ECB action * Risk of disappointment limits upside to euro By Gertrude Chavez-Dreyfuss NEW YORK, Sept 4 (Reuters) - The euro slid against the dollar on Tuesday after two days of gains as investors grew cautious that a European Central Bank plan to tackle the region's debt crisis may lack detail. Softer-than-expected data on U.S. manufacturing further eroded risk appetite on Tuesday, boosting the dollar's appeal as a safe haven for some investors. Investors, however, were more focused on the euro ahead of an ECB meeting on Thursday at which policymakers are expected to announce a bond-buying plan to help lower Spanish and Italian borrowing costs. That speculation was reinforced on Monday when ECB President Mario Draghi said central bank purchases of sovereign bonds of up to three years maturity did not constitute state aid. . Still many traders would rather wait and see if the ECB will indeed deliver on its commitment to help out debt-plagued countries in the euro zone. "Market participants were a little bit anxious that the ECB may disappoint," said Steven Butler, director of FX trading at Scotia Capital in Toronto. "It may cut rates but a lot of people are concerned that the ECB may not be able to get its act together to announce something really firm about the bond-buying program." Any move by the ECB to stem the debt crisis is expected to lower the additional cost of holding assets perceived to have higher risk. The euro was last down 0.2 percent at $1.2565, not far from the two-month high of $1.2636 touched last week. U.S. markets were closed on Monday for the Labor Day holiday which increased volatility in Tuesday's New York session as traders have less time before the ECB meeting to stake their positions. Kathy Lien, managing director at BK Asset Management, is not too optimistic either, noting that "during the debt crisis, European policymakers have a track record of disappointment." Investors are hoping the ECB will at least reveal the range of maturities eligible for purchase and that conditions are not too stiff for peripheral countries to seek aid. Morgan Stanley strategists said they did not expect the euro to push much higher before the ECB meeting and would take profits at their $1.27 target if it was reached before Thursday. Additionally, investors are likely to be cautious about the euro given the economy is struggling, putting pressure on the ECB to lower interest rates in the coming months. French President Francois Hollande said on Tuesday that an EU leaders summit on Oct. 18-19 could finalize solutions, not just on debt-stricken Greece but also Spain, whose government has so far resisted seeking an EU bailout despite a deep recession. FED EASING PROSPECTS Euro weakness against the dollar could be limited in the near term, however, by speculation the Federal Reserve may launch another bond buying program, known as quantitative easing, this month to boost the struggling U.S. economy. U.S. nonfarm payrolls data due on Friday are expected to provide an important gauge of the strength of the economy and the likelihood of further Fed easing. The dollar briefly trimmed gains against the euro on Tuesday after a survey showed U.S. manufacturing shrank at its sharpest clip in more than three years in August, the third straight month of contraction, and firms hired the fewest workers since late 2009. "It's a disappointing number that can bring the Fed a step closer to offering more support to the U.S. economy," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. The dollar was firmer against the yen, helped in part by buying from Japanese importers. The U.S. dollar was up 0.2 percent against the yen at 78.36 yen. The dollar index was also up, by 0.1 percent at 81.318 . Link this Share this Digg this Email Reprints

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