SINGAPORE: The euro eased versus the dollar but clung to much of the previous day's gains on Wednesday, with investors focusing on whether the US Federal Reserve will adopt further monetary stimulus to support the economy's recovery.
The euro also gained some support from signs that Greek parties may be close to forming a coalition government, and as Spanish government bonds gained a bit of respite on Tuesday after a recent sell-off.
For now, however, the Fed's policy decision due later on Wednesday is taking centre stage.
"I think the overwhelming factor is some expectation of Fed stimulus today," said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong.
"Looking at the overnight moves, it's not just the euro that has risen," he said. "We've had a bunch of currencies taking advantage of the softness of the dollar."
The euro dipped 0.1 percent to $1.2675, giving back a bit of ground after climbing about 0.9 percent on Tuesday.
Resistance for the euro lies at $1.2748, a one-month high struck on Monday after Greek voters backed a pro-bailout party in weekend elections and fears of a disorderly Greek exit from the euro zone receded, at least for the time being.
With Spain's 10-year government bond yields having hit euro-era highs this week, fanning speculation that Spain may need a full-blown bailout, market players expect any bounce in the euro to be limited.
While investors may see some appeal in the high yields on Spanish bonds, they seem reluctant to buy until the market calms down, said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.
That bodes ill for the euro, which has been taking cues from moves in Spanish bond yields, he added.
"Unlike Greece, no one thinks that Spain will leave the euro," Okagawa said. "So I think market players want to grab the knife once it hits the ground, but they don't want to catch it now while it's falling," he said, referring to Spanish debt.
One idea that might help curb rises in Spain's borrowing costs is an Italian proposal, put forward at a G20 summit on Tuesday, for the euro zone's rescue funds to start buying the debt of distressed European countries.
The proposal is expected to be discussed at a meeting of European leaders on Friday.
The euro could see a short-covering bounce if the proposal is implemented, but a sustained rise is unlikely, said a trader for a major Japanese bank in Singapore.
"It probably won't be seen as a step that provides any fundamental solution, and it might just give people a good selling opportunity," the trader said.
Many market players now seem to be looking to sell the euro if it rises towards $1.2800, he said. If the euro manages to rise above $1.2830, however, that could trigger some buy back of the single currency, the trader added.
FED DECISION
The dollar hovered near a one-month low against a basket of currencies ahead of the Fed's decision on Wednesday.
The dollar index stood at 81.438, not far from the one-month low of 81.186 hit on Tuesday.
While many market players doubt that the Fed will go so far as to launch another round of quantitative easing, a policy that entails the expansion of its balance sheet via bond purchases, there might still be some disappointment if the Fed holds off from such stimulus, market players say.
A more likely scenario is for the Fed to extend "Operation Twist", a programme aimed at pushing down long-term borrowing costs by selling short-term securities to buy longer-term ones. The scheme is now due to end in June.
If all the Fed does is to extend "Operation Twist", the dollar could head higher, said Credit Agricole's Kotecha.
"So that could provoke a bit of disappointment if that is the case," he said.
The dollar eased 0.1 percent versus the yen to 78.85 yen . ?Reuters
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