MSN:Euro steady, investors nervous before ECB meeting
LONDON (Reuters) - The euro was subdued against the dollar on Tuesday, trading below recent three-week highs on growing doubts the European Central Bank can meet market expectations of bold steps to combat the euro zone debt crisis.
The euro hit a record low against the growth-linked Australian dollar, with higher-yielding currencies retaining gains on expectations that both the ECB and the U.S. Federal Reserve will nonetheless ease policy to support faltering growth.
The single currency was flat at $1.2260, staying below the high of $1.2390 hit last Friday. Traders cited bids at $1.2250/60 with stop-loss orders below $1.2225. Offers to sell the euro were reported above $1.2300, all of which are likely to keep the euro in a tight range, traders said.
Investors are focused on the ECB policy meeting on Thursday, after President Mario Draghi pledged last week to do whatever was necessary to protect the euro zone from collapse. That raised expectations of a bold response to the euro zone crisis from the ECB, a move which could give the euro a boost.
But investors are increasingly questioning 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 policy measures, the euro could fall back below $1.2130, he said, but a firm response could lift it above last week's peak.
"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.
Such a "shock" is unlikely with most traders and analysts skeptical that a resumption of ECB purchases of government bonds by itself would be enough to change the euro's weak overall trend. That is largely because expectations of further interest rate cuts by the ECB would keep sentiment towards the currency negative, analysts said.
Earlier this month, the ECB cut its deposit rate, at which banks park excess funds with the bank, to zero, making the euro a funding currency for investors seeking higher yields.
FX DIVERSIFICATION
Since the rate cut, analysts said a popular trade has been to sell the euro against the higher-yielding Australian dollar. The euro fell to a record low of A$1.1645 on Tuesday.
Analysts said central banks have also increased holdings of higher-yielding currencies and that could be one reason why the Australian dollar has been in demand. The Aussie was trading near a four-month high against the U.S. dollar at $1.0515, having hit $1.0538 earlier in the day.
"We've already seen some serious diversification, not just out of the periphery but out of Europe altogether, and these are longer term decisions and they are not going to turn around in the short term," said Jesper Bargmann, Asia head of G11 spot FX at RBS, Singapore, referring to a shift in asset allocation by central bank reserve managers out of the euro.
The Swiss National Bank said on Tuesday published data on its foreign exchange reserves, showing a second quarter increase in euros as well as in "other" currencies.
"The (data) suggests the central bank had been an active buyer of currencies including the Australian dollar (and) Swedish crown," UBS FX strategist Geoffrey Yu said in a note.
These growth-linked currencies tend to benefit when optimism about the outlook for the global economy picks up.
While the Fed is seen likely to hold off from adopting another bond-buying program at its two-day policy meeting that starts on Tuesday, some market players think the U.S. central bank might adopt such monetary stimulus in coming months.
