WSJ:WORLD FOREX: Directionless Euro Belies Greek Tensions
--Directionless trade prevails ahead of Fed's Bernanke's speech Friday
--Euro, commodity-linked currencies reverse early gains
--Bonds take the strain as euro shrugs off latest Greek developments
By Clare Connaghan
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--Currency markets treaded water in European trading hours Thursday with traders nervous about putting on new bets ahead of Federal Reserve Chairman Ben Bernanke's speech at the central bank's gathering in Jackson Hole Friday.
Short-term dips and rallies in the euro, and in the commodity-linked currencies of Australia, New Zealand and Canada quickly evaporated.
Expectations that Bernanke will announce additional monetary easing have been scaled back of late, but currency traders are still shying away from placing large bets until the event passes as they puzzle over which of the major currencies to buy or sell. As a result, subdued trading is likely to prevail with currencies holding tightly within recent ranges, market participants say.
"There seems to be a distinct lack of appetite in foreign-exchange to break near term ranges ahead of the Jackson Hole confab, where expectations for substantive liquidity measures have been whittled down in the past 30 hours," said Sue Trinh, a senior currency strategist at RBC Capital Markets.
This left the bond markets to take the strain as the drumbeat of unnerving news about the euro-area debt crisis continued.
Among the highlights, many of Greece's lenders, with the exception of National Bank of Greece SA (NBG), have expressed their intention to participate in a special liquidity facility by the country's central bank.
The move is an attempt to meet a drain on funds caused by the government's redemption of expiring bonds, according to an article published Thursday in Imerisia newspaper.
In addition, there has been no breakthrough on the impasse over Finland's demands for collateral in exchange for its contribution to the Greek bailout, leaving the rescue package agreed last month in doubt. A European Union source said the matter is unlikely to be resolved this week.
Meanwhile, nerves are surfacing over the German constitutional court, which rules over German participation in the Greek rescue fund on Sept 7.
Analysts agree that the potential for large jerky currency moves is very significant over the coming weeks. Bond investors are clearly showing their nerves that a default could be coming later this year.
The yield on two-year Greek government debt breached some 43% Thursday, while the cost of insuring Greek bonds against default kept spiralling higher, albeit in thin trading conditions.
Elsewhere, the dollar nudged higher against the yen, a day after Japanese authorities announced a two-pronged offensive aimed at curbing the currency's strength, creating a $100 billion fund to help spur investments by companies operating abroad and imposing new rules requiring financial firms to disclose their foreign exchange holdings.
At 1045 GMT, the dollar was trading at Y77.152 against the yen, compared with Y76.97, while the euro was at Y111.470 compared with Y110.94.
Meanwhile, sterling was steady with the market showing no reaction to data revealing U.K. retail sales had fallen at the fastest pace in over a year in August, according to the Confederation of British Industry. At 1045 GMT, the pound was at $1.63680 against the dollar, compared with $1.6248 late Wednesday in New York.
Looking ahead, with the data calendar light and no speakers on the agenda, currencies are expected to remain directionless and range-bound.
In emerging markets, Poland was the spotlight after the Central Bank Governor Marek Belka said the Monetary Policy Council is significantly less eager to continue raising interest rates than it was in the first half of the year, as inflation in the country is easing and economic growth is slowing.
At 1045 GMT, the euro was trading at $1.4445 against the dollar, compared with $1.4415 late Wednesday in New York, according to trading system EBS.
The ICE Dollar Index, which tracks the dollar against a trade-weighted basket of currencies, was at 73.938 compared with 74.031 late Wednesday in New York.
