Dollar struggles, traders cite SNB in forward market

LONDON: The euro edged up on Monday, tracking a rise in European shares, while the dollar was on the back foot on speculation th e Federal Reserve may highlight later in the week the need to keep supporting the US economy.

Traders said Switzerland's central bank was intervening in the one-month Swiss franc forward market to drive down the forward rate and to deter potential investors from holding the surging franc. The Swiss National Bank (SNB) declined to comment.

That kept investors jittery that the SNB could sell francs in the spot market.

Traders also speculated that Japanese authorities could soon intervene to weaken the yen and that kept the dollar buoyed above an all-time low versus the yen.

As the US economic recovery sputters, some investors have speculated that Fed chairman Ben Bernanke, due to speak at the central bank's annual retreat in Jackson Hole, Wyoming, on Friday, could signal a willingness to implement more economic stimulus in the form of a third round of quantitative easing, or QE3. At last year's event he flagged QE2.

Others anticipate Bernanke will highlight the need to continue supporting the economy, but may not go so far as to announce more asset buying by the central bank.

The prospect of more QE, along with concerns about US fiscal problems, has stung the dollar in past months, but analysts say the market is unwilling to sell the currency much further until it has a more concrete view of the Fed's outlook.

"A lot of people are expecting a potential game changer from Bernanke this week, which is largely dampening FX moves at the moment," said Ulrich Leuchtmann, currency strategist at Commerzbank.

"There's large event risk, but the market at the moment has lost its appetite to bet on either side because it is in risk-aversion mode, and so it's not willing to make big bets in any direction."

The latest IMM positioning data shows speculators increased their bets against the dollar last week.

While the figures show a rise in net long positions in the euro, or bets the euro will rise, some analysts point out speculators have been trimming both long and short positions in the single currency.

The euro traded 0.1 percent higher on the day at a session high around $1.4420, supported by a 1.7 percent rise in European shares, which picked up after tumbling 6 percent last week.

The single currency traded 0.3 percent higher on the day against the Swiss franc at 1.1335 francs. Its one-month forward rate was around -26.60, falling towards roughly -30.40 hit last week.

In a bid to tame the surging franc, the SNB in the past few weeks has been selling short-dated francs in the forward market to flood the market with the currency and drive down its returns.

YEN INTERVENTION LOOMS

The euro's gains were limited as sentiment remains negative on the view that euro zone officials are continuing to drag their feet in solving the region's debt problems.

This was highlighted by comments from German Chancellor Angela Merkel, who on Sunday rebuffed calls for the euro zone to issue joint euro-denominated bonds as a way for fiscally weak euro zone countries to borrow.

"If things start to take a turn for the worse in the euro zone, it's hard to see what they can come up with to help," said Richard Falkenhall, currency strategist at SEB in Stockholm, adding that this risk would keep the euro on the back foot.

The dollar rose 0.3 percent to 76.70 yen. It rebounded from a fall to 75.94 yen late last week, its weakest level since World War 2, which had ramped up speculation that Tokyo will prop up the dollar against the yen.

Japanese officials have said they are ready to intervene to weaken the yen, while adding they have no plans to intervene often.

Many in the market expect the risk of a deterioration in the euro zone debt crisis amid a darkening global economic outlook will keep upside pressure on the yen and the Swiss franc as both are perceived as safe assets during times of economic uncertainty.

Market participants say the euro may come under renewed selling pressure this week, and fall towards $1.40, if there are signs the euro zone debt crisis is spreading to bigger economies Italy, Spain and France.

Currencies showed little initial reaction to news that Libyan leader Muammar Gaddafi's 42-year reign looked to be hanging by a thread after rebels swept into Tripoli.

Analysts said currencies would take a cue from the reaction in oil prices, which fell nearly 2 percent on Monday on the news. A further fall may stoke some demand for riskier currencies on the view that lower oil prices would be positive for global economic growth, they said.

Copyright Reuters, 2011