The euro was mostly flat on Thursday, treading water ahead of the European Central Bank policy meeting, while rising risk appetite across markets lifted higher-yielding currencies at the expense of the Japanese yen. Growing optimism that the worst of the financial crisis is over, despite expected confirmation later on Thursday that many U.S. banks need billions of dollars of fresh capital, extended global stock markets' recent rally and risk-taking generally. This boosted relatively high-yielding currencies like the Australian and New Zealand dollars while the yen, traditionally the currency investors sell to fund carry trades, fell broadly. Surprisingly resilient employment data from Australia and New Zealand boosted their currencies and the euro's only notable gains were against the yen, to within sight of a break of technical resistance at the 200-day moving average 132.62 yen. "Global financial markets are being force fed liquidity, and that's spilling out. It's not that investors particularly want to take risks but they're being forced to take risks," said Robert Minikin, senior strategist at Standard Chartered. "It's yield seeking in what is a very, very low yield world," he said. The Bank of England is expected to leave key rates on hold at 0.5 percent and may shed more light on its quantitative easing program of buying assets to lower long-term interest rates and kickstart lending. But there's more uncertainty surrounding the ECB. The ECB is widely expected to cut its key interest rate to a record low of 1 percent, possibly its final cut in this cycle, but practical and philosophical objections among policymakers could likely to ensure any unconventional measures aren't particularly bold. "The real question is on quantitative easing from the ECB, and we believe the ECB will be relatively cautious," Minikin said. At 1005 GMT the euro was flat at $1.3315, below a one-month high of $1.3439 hit on Tuesday on EBS and the 200-week moving average technical resistance of $1.3414. The euro was down 0.1 percent against sterling at 87.95 pence, having earlier hit a 10-week low of 87.65 pence but was up 1 percent against the yen at 132.35 yen. AUSSIE BOUNDS HIGHER "There is some nervousness that the ECB may come across as either divided or unwilling to do anything aggressive," said Daragh Maher, senior FX strategist at Calyon in London. "And with markets in an upbeat mood there are more obvious candidates to buy -- the Australian dollar, for example -- to play the upside rather than the euro," he said. The Australian dollar hit a seven-month high of 75.31 yen after data showed Australian employment gained against all expectations and threw doubt on the need for further rate cuts.

Source