ET:Euro steady against dollar but risk of ECB disappointment is high
LONDON: The euro was steady against the dollar on Monday, drawing support from expectations the European Central Bank will take bold steps this week to stem the debt crisis, although flagging growth prospects were likely to limit gains.
The growth-linked Australian dollar fell to fresh six-week lows against both the dollar and the yen as investors sold up amid more signs of weakness in the Chinese economy and a set of weak Australian data.
The euro stood at $1.2575, flat from levels in late U.S. trade and off an eight-week peak of $1.2638 set on Friday after Federal Reserve chief Ben Bernanke's speech fanned expectations of further stimulus to revive growth. Traders cited reported option barriers at $1.2650, with decent resistance at the July 2 high of $1.2681.
The euro has also been underpinned by expectations the ECB will soon unveil a bond buying programme, probably at its policy meeting on Thursday, aimed at lowering borrowing costs for peripheral euro zone countries like Spain and Italy.
That is expected to lower the risk premia - or the additional cost over low-risk securities - on holding European assets as well as the euro.
"While the euro could rally to the $1.2670/80 region as short positions are trimmed, we are likely to see investors sell into it as there is a great of deal of uncertainty about what the ECB may announce on Thursday," said Jeremy Stretch, head of currency strategy at CIBC World Markets.
"Along with bond-buying plans there will be updates on growth and inflation. So there is a risk of disappointment."
The ECB is likely to downgrade growth forecasts this week and this would build pressure on it to lower interest rates in coming months. Data on Monday showed German and French factory activity contracted in August.
ECB President Mario Draghi skipped last week's Jackson Hole symposium to try to smooth over a deep rift within the ECB over the bond scheme that is increasingly being played out in public.
Despite the differences within the bank, investors hope Draghi will prevail over German opposition to the programme. Reflecting such views, speculators have been cautiously trimming pessimistic positions on the euro over the past several weeks.
Data from the US financial watchdog showed on Friday that speculators have cut their bets against the euro to the smallest since April.
