WSJ:WORLD FOREX: Euro Set To Fall If ECB Disappoints
-- Attention focused on upcoming ECB meeting
-- Market looking for 25 basis point cut in rates, changes to long-term financing program
-- Measures falling short of expectations likely to trigger sharp fall in euro
-- EU summit ending Friday waiting in the wings
By Takashi Mochizuki
Of DOW JONES NEWSWIRES
TOKYO -(Dow Jones)- The short-term fate for the euro rests with the outcome of a highly anticipated meeting of the European Central Bank to take place later Thursday, with a two-day summit of European Union leaders starting later in the day looming in the background, traders said.
"Before these events, people will remain immobile," said Osao Iizuka, head of FX trading at Sumitomo Trust and Banking.
Traders say the market is looking for a 25 basis-point cut in ECB lending rates, steps to allow banks to pledge a wider range of collateral to borrow funds from the central bank, and an increase in the duration of the ECB's long-term lending facility, the LTRO, to two or even three years.
"A rate cut is in general negative to a currency, but in today's case the ECB's rate cut is seen as a part of the region's efforts to cap its debt problems. Since markets have factored in a 25-bps cut, the euro may fall sharply if the bank fails to act," said a senior dealer at a major bank in Tokyo.
Atsushi Hirano, head of foreign exchange sales at RBS in Tokyo, said that a euro fall would likely be limited to a still-sizable 100 pips, with buying emerging at that level and attention then turning to the EU summit, which concludes Friday. Traders are looking to see if the often-fractious group will be able to come up with a viable program to ensure progress is made in tackling the euro-zone debt crisis--or at the very least in stopping it getting any worse.
With so much hanging in the balance, traders punted the euro back and forth in a narrow range in Asian trading Thursday. The beleaguered currency was at $1.3408 according to data from EBS in early afternoon trade, little changed from $1.3413 in New York on Wednesday.
The story was similar against the yen, which was trading at Y104.12 from Y104.17.
The yen also retained its recently new-found sense of calm against the dollar, with the U.S. currency at Y77.65 from Y77.68 in New York.
There was little reaction to Japanese data out showing that the economy continued to post a current account surplus in October, although at a 62% lower level than a year ago. The nation's big exporters have been hit by the high value of the yen, weak global markets and the March earthquake.
Elsewhere, the British pound was at $1.5712 from $1.5708 while the dollar was at CHF0.9248 from CHF0.9235. The ICE Dollar Index was at 78.435 from 78.414.
Interbank Foreign Exchange Rates At 2350 EST / 0450 GMT
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