Euro rises versus dollar in London

The euro edged up against the dollar on Thursday, helped by reported buying by model funds, but was vulnerable to a selloff if Federal Reserve President Ben Bernanke fails to signal more economic stimulus in a speech on Friday. The single currency was last up 0.2 percent at $1.4438, down from a session high of $1.4475 touched in early European trade after selling from a US investment bank. The dollar index was down 0.1 percent at 73.938.
Speculation of a third round of quantitative easing has dented the dollar in past weeks, and some investors are worried the US economy could slip into a recession. But many in the market are not convinced Bernanke is ready to signal another round of bond-buying to stimulate the economy. Analysts said the market was over-optimistic about the possibility of more QE, adding that a rise in bets to sell the dollar in past weeks suggested those positions may be unwound as an initial reaction to Bernanke's speech.
Any more quantitative easing is seen boosting stocks, higher yielding currencies and the euro while the dollar is likely to be sold off. On the other hand, if Bernanke disappoints markets, the dollar is likely to benefit, at least in the short term. "The consensus now is that nothing major will be announced and that will be fairly supportive of the dollar," said Chris Walker, currency strategist at UBS. While few in the market expect a firm commitment to QE3, Bernanke may pledge readiness to act to help the economy in future if necessary, which could help riskier currencies including the Australian and New Zealand dollars gain against the greenback after an initial knee-jerk drop.
Henrik Gullberg, currency strategist at Deutsche, said Bernanke would have to sound "very dismissive" about any policy stimulus for the market to significantly price out the possibility of further QE sometime in the future. Trade was muted on Thursday as traders wary about being wrongfooted by Bernanke refrained from initiating fresh positions. Analysts agreed that after Bernanke's speech the market's focus will likely move back to Europe's sovereign debt woes and the fragility of the euro zone economy and banking sector, along with the weakening global growth outlook.
That switch in focus could push the euro back towards record lows against the safe-haven Swiss franc. It was last trading at 1.1469 franc, while the dollar slipped 0.2 percent versus the franc to 0.7941 francs. It inched up 0.3 percent to 77.18 yen, supported for the time being by talk Japan may enter the FX market to stem ongoing strength in its currency, which rallied to a record high of 75.94 to the dollar last week. The Australian dollar was flat on the day while the New Zealand currency edged up 0.2 percent, supported by a better-than-expected reading of New Zealand retail sales.