By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — The U.S. dollar lost ground Tuesday, with the euro finding renewed support on growing optimism that the European Central Bank will take steps to bring down borrowing costs for peripheral governments.
The ICE dollar index DXY -0.43% , which tracks the U.S. unit against a basket of six major riavls, fell to 82.100 from 82.475 in North American trade late Monday.
The euro EURUSD +0.61% changed hands at $1.2409, up from $1.2346.
“The market may be optimistic that the ECB will act to subdue peripheral yields in September, but that implies that there is plenty of scope for disappointment,” Jane Foley, senior currency strategist at Rabobank International.
`Misleading’ report
The ECB on Monday said that a weekend news report that it was weighing a plan to cap sovereign-yield spreads in the euro zone was “misleading,” while the German Bundesbank reiterated its opposition to any renewed bond-buying effort by the ECB.
Strategists said quiet trade and a buildup of short bets against the euro had set the stage for a modest short-covering rally.
They noted, however, that the ECB has made clear it is unwilling to take any action unless governments such as Spain or Italy first apply to the euro-zone rescue fund for help and agree to strict policy conditions.
“The calmer tone in [the] peripheral-bond market itself could provide the incentive for officials to delay taking action. We continue to see risk of dips back towards $1.20 on a one-month view, though into the New Year we expect that Fed policy action will weaken the dollar, allowing EUR/USD to recover a little ground,” Foley said in a note.
Spanish debt sale
Spain sold 4.51 billion euros ($5.58 billion) of 12- and 18-month Treasury bills on Tuesday, with borrowing costs falling compared with auction results last month, news reports said.
Spanish yields have fallen sharply, particularly at the short end of the curve, since ECB President Mario Draghi last month vowed that the ECB would do “whatever it takes” within its mandate to preserve the euro.
The British pound GBPUSD +0.36% rose to $1.5764 from $1.5712.
The British government borrowed more than expected in July, data from the Office for National Statistics showed Tuesday, with the public sector net borrowing requirement rising by 557 million pounds ($874.2 million). Economists had forecast a July surplus of ÂŁ2.5 billion.
Against the Japanese yen USDJPY +0.02% , the dollar traded at 79.42 yen, little changed from ÂĄ79.41 late Monday.
The Australian dollar AUDUSD +0.65% rose to $1.0504 from $1.0454 versus its U.S. counterpart.
Policy makers at the Reserve Bank of Australia signaled satisfaction with the bank’s key lending rate at 3.5% but offered little forward-looking commentary in minutes of their Aug. 7 meeting released Wednesday. Read: Australia central bank says policy appropriate.
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt.
