Euro edges higher versus dollar ahead of ECB

   on July 31 2012 10:56 AM
Euro edges higher versus dollar ahead of ECB
Euro edges higher versus dollar ahead of ECB Reuters

The euro edged higher against the dollar and yen on Tuesday on expectations the European Central Bank may take further actions to help contain the debt crisis later this week.

Speculation grew the ECB could revive its bond purchase program to help lower the borrowing costs of debt-stricken Spain and Italy after ECB President Mario Draghi said last week the bank would do whatever it takes to save the euro. But analysts cautioned the bank may disappoint.

"It's going to be more or less buy the rumor, sell the fact," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. "So expect the euro to be well supported up to just before the decision and then probably some profit-taking thereafter."

The euro rose as high as $1.2318 on Reuters data, still below a three-week high of $1.2389 set last week. It was last at $1.2283, up 0.2 percent. It also rose 0.4 percent to 96.16 yen.

Month-end demand also supported the euro as traders reported sovereign buying in the euro/sterling and euro/Swiss franc currency pairs. Traders cited strong offers above $1.2300 while bids were layered below $1.2250 and stop losses at $1.2220.

Many analysts questioned 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 license 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, but a firm response could lift it above last week's peak, he said.

"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.

Investors also awaited a policy announcement from the Federal Reserve at the end of its two-day meeting on Wednesday. While the Fed is likely to hold off from adopting another bond-buying program for now, some analysts say it might adopt such monetary stimulus in coming months.

The dollar edged up 0.1 percent to 78.21 yen.

AUSSIE GAINS

The euro hit a record low against the higher-yielding Australian dollar of A$1.1638. Expectations that the ECB may lower interest rates again in the coming months have made the euro a favorite funding currency for investors seeking higher yields.

The Australian dollar also hit a four-month high against the U.S. dollar at $1.0538, buoyed by comments from Chinese premier Wen Jiabao that China would fine-tune policy to support economic growth.

Analysts said long-term investors like central banks have also increased holdings of high-yielding currencies, especially at the expense of the euro.

Data from the Swiss National Bank showed an increase in euro holdings in the bank's foreign-exchange reserves in the second quarter as it has been defending the 1.20 franc per euro peg since last September by buying the common currency.

That led to speculation that the SNB may soon be selling euros in favor of other growth-linked currencies such as the Australian dollar.

"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.

Data on Tuesday showed U.S. single-family home prices rose for the fourth month in a row in May, while spending by American consumers fell in June for the first time in nearly a year when accounting for inflation. But the market impact was limited as investors focused on the Fed and ECB meetings this week.

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