Reuters: US Dollar Report: FOREX-Euro rallies on talk of ECB plans for bond purchases

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FOREX-Euro rallies on talk of ECB plans for bond purchases Sep 5th 2012, 12:52 Wed Sep 5, 2012 8:52am EDT * Euro rallies on talk of ECB plans for bond purchases * Euro zone data gloomy, * Aussie skids to eight-week low NEW YORK, Sept 5 (Reuters) - The euro reversed earlier losses and rose sharply on Wednesday on media reports that the European Central Bank would, with broad support from its council members, unveil an unlimited, sterilized programme of bond purchases. Some investors were already betting that the ECB would announce details on Thursday, when it holds a policy meeting, of a bond-buying programme to lower Spanish and Italian borrowing costs ahead of the news but the majoritiy of investors were more skeptical. But until the leak of the ECB's plans they were being outweighed by pessimism that any announcement would fall short of market expectations. And while the euro was higher, some cautioned that the volatility was far from over. "I think the market saw the word 'unlimited' and jumped before realizing that the ECB would not expand its balance sheet as it would sterilize all its purchases and thus this was not the kind of aggressive monetary expansion that FX traders were looking for," said Boris Schlossberg, managing director of FX Strategy at BK Asset Management in New York. "Net takeaway is that if this is sterilized it will probably not be enough to keep the bond vigilantes at bay. Furthermore the backing away from any specific yield targets is exactly the lack of clarity that the FX market will not like." The euro was last up 0.2 percent at $1.2589, heading back to the two-month high of $1.2636 touched on Friday. The euro has risen from a two-year low of $1.2040 in late July since ECB chief Mario Draghi pledged he would do everything to preserve the currency, suggesting possible intervention in bond markets to lower peripheral countries' borrowing costs. He told European lawmakers on Monday that purchases of short-term sovereign bonds to help debt-burdened countries would not breach European Union rules, according to a recording obtained by Reuters. WEDNESDAY DATA Data on Wednesday confirmed French and German services sectors contracted in August, showing the economic rot was spreading well beyond the periphery and raising the chances of the ECB cutting interest rates in coming months. Credit Agricole were forecasting a 25 basis point cut in the refinancing rate on Thursday, which FX strategist Stephen Gallo in London said could knock the single currency briefly lower. "A cut would take some people by surprise and we could see weakness in the euro. But some might believe that is indicative of a very euro positive outcome from Draghi's press conference and would not want to be short going into that," he said. Beyond the ECB meeting, investors are looking to U.S. non-farm payrolls data on Friday. A weaker-than-expected number could bolster expectations of more quantitative easing by the Federal Reserve, perhaps later this month. The dollar was steady at 78.42 Japanese yen. The Australian dollar hit an eight-week low against the U.S. dollar on speculation the Reserve Bank will cut interest rates to cushion the economy from falling commodity prices. The Bank of Canada meets on Wednesday and investors will look beyond its expected decision to keep the main policy rate at 1 percent to focus on whether Governor Mark Carney will change the message that the central bank may need to hike rates. Some analysts say he may change tack and that could weigh on the Canadian dollar, which was lower on the day. The U.S. dollar was up 0.2 percent at C$0.9876. "Many observers believe that Governor Carney will have to change now that both the ECB and the Fed look to provide further easing measures maybe as early as this month," said Dean Poppelwell, chief currency analyst at OANDA in Toronto. But he expected the Canadian dollar to draw support from sovereign investors diversifying out of the dollar and the euro. Link this Share this Digg this Email Reprints

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