LONDON - The euro held near a three-month high against the U.S. dollar on Tuesday ahead of an injection of cheap cash by the European Central Bank that could boost risk appetite and the common currency in the near term.
It also advanced against the yen, although it stayed well below a four-month peak. The yen pulled away from a 9-month low against the dollar reached the day before on month-end buying by Japanese exporters, but short-covering by hedge funds saw it relinquish some of those gains.
Currency investors sidestepped news that Standard & Poor’s cut its ratings on Greece to “selective default” as Athens’ efforts to lighten its debt burden was largely expected to trigger the downgrade.
They also took in their stride the ECB’s temporary suspension of Greek bonds as collateral for its funding operations as well as a solid Italian debt auction.
Still, many were cautious about pushing the euro too much higher ahead of an ISDA ruling on Wednesday. The derivatives body will rule whether a Greek credit event has taken place after the country began a bond swap process.
The euro stood at $1.3444, up 0.3 percent on the day, trading not far from a near three-month peak of $1.3487 set on Friday. Traders cited decent offers at $1.3480 and a reported option barrier at $1.3500 which would check gains.
Immediate support for the common currency is seen in the $1.3357-66 area around recent lows, with $1.3291 marking the 38.2 percent retracement of the Feb. 16-24 rise.
“The euro has priced in a cash injection of 500 billion euros and anything above 600 billion will be risk positive and push the euro higher,” said Ankita Dudani, G-10 currency strategist at RBS Global Banking.
On the other hand, a take up of less than 400 billion will hurt risk appetite and could drag the euro lower, she added.
A Reuters poll of money traders showed banks will take up half a trillion euros of ECB funds, roughly the same as the previous offering last year. This is seen as buying more time for authorities to sort out the sovereign debt crisis.
In the derivatives market, euro/dollar overnight implied volatilities were trading around 14.5 percent. Olivier Korber, option strategist at Societe Generale, said this translated into a daily move of 0.7-0.8 percent either way, which meant traders were not expecting a sharp move in the spot rate.
Beyond the ECB’s long term refinancing operation, prospects for the euro look rather dim, given chances of further rating downgrades, worries that peripheral countries will continue to struggle to meet fiscal targets and the tough austerity measures will hurt growth.
All of which could see the European Central Bank maintain an accommodative monetary policy and push it to lower interest rates in coming months, a factor that could drag the euro lower.
Yen choppy
In contrast to the euro zone, U.S. economic activity is showing signs of a more sustained recovery, pushing yields higher, although that move seems to be running out of steam.
Higher U.S. yields and better prospects for the economy have been supporting the dollar against the yen. Also weighing on the yen and putting it on course for its sharpest monthly drop in two years is a record trade deficit, shrinking current account surplus and surprise policy easing by the Bank of Japan.
The dollar was flat at 80.50 yen, having hit a nine-month high of 81.66 yen the day before. It briefly fell as low as 80.01 yen, but managed to bounce back, supported by dollar-buying by Japanese investors unwinding their currency hedges.
“Any retracement that we see in the dollar will be a good opportunity to position for more yen weakness,” said Stuart Frost, head of Absolute Returns and Currency at fund managers RWC Capital Partners. “We are positioning for the dollar to rise to 85 yen in the next three months.”
The dollar’s rally on Monday stalled a little above a strong technical resistance at 81.62 yen, marked by the 61.8 percent retracement of the slide from its 2011 high to that year’s low. Chart supports for the dollar are seen near 80.10 yen area, including Monday’s low of 80.13.
Short-covering by leveraged accounts and yen selling by Japanese importers pushed the euro up to 108.12 yen, 0.2 pct higher compared to late New York levels, but it was still well off the four-month peak of 109.95 yen hit on Monday.
