Euro slips before ECB rate decision, may bounce

LONDON: The euro eased against the dollar on Thursday, as investors struck a cautious tone ahead of an European Central Bank rate decision, with policymakers likely to change tack and flag a pause in its monetary tightening cycle.

The single currency could get a brief lift if ECB President Jean-Claude Trichet quashes the possibility of interest rate cuts later in the year, which are priced into money markets.

Any bounce in the euro, though, is likely to offer a good opportunity to sell as a sovereign debt crisis still threatens the region's financial system and larger economies such as Italy and Spain.

The euro was down 0.2 percent at $1.4064 with major resistance seen around $1.4200, the 38.2 retracement of its fall from late August to early September. Traders cite bids at $1.4000-$1.4025, while bids from Asian central banks are seen in the $1.3970-75 area.

"Markets are a bit cautious going into the ECB rate meeting," said UBS currency analyst Chris Walker. "We could see a bounce in the euro as pricing in for rate cuts in October is a bit far-fetched. But any lift is likely to see some more selling."

The ECB is widely expected to halt its tightening cycle just two months after hiking rates, to 1.5 percent, for the second time in 2011 and lower its inflation forecasts. Money markets are pricing in a chance of a cut as early as October, as the debt crisis shows no sign of letting up and the global economic outlook deteriorates.

The euro has gained more than 5 percent against the dollar this year, mainly on widening interest rate differentials between the United States and the euro zone.

The currency has rarely dipped below $1.40 in the past few months, despite the sovereign debt problems and waning rate hike expectations, supported by Asian central bank diversification.

It held above a seven-week low of $1.3972 hit on Monday, and hovered above its 200-day moving average around $1.4023.

Investors will also be looking at what Trichet says about its buying of peripheral debt given internal divisions over the programme. The ECB has been buying Italian and Spanish bonds, to drive down borrowing costs, but investors are looking for a more durable solution to the debt crisis.

"The wrangling over fiscal policy and now with Greek data showing the economy contracting, pessimism about the region is growing and is suppressing any upside in the euro," said Adam Myers, senior currency strategist at Credit Agricole.

Data from Greece showed the economy shrank 7.3 percent in the second quarter, from a year ago, more than the 6.9 contraction in the flash estimate. Such data is likely to make it even more difficult for Greece to meet tough conditions needed to secure aid from international lenders and the EU.

Constant bickering among the 17 member countries in the euro zone on policies, including whether to take collateral from Greece for aid, has even given rise to concerns among some investors that the bloc may eventually break up.

DOLLAR DOES NOT LOOK GOOD EITHER

However, any enthusiasm for more bearish bets on the euro may be countered by expectations that US Federal Reserve Chairman Ben Bernanke, speaking at 1730 GMT, might drop clearer hints on the likelihood of more stimulus later this month.

Any hint of more easing could hurt the dollar.

Traders also said initial excitement over US President Barack Obama's plan to propose new job measures, due at 2300 GMT, has begun to wear off amid doubts over how much Washington can spend after the acrimonious debt ceiling saga in Congress just over a month ago.

The dollar was up 0.5 percent against the Swiss franc, hitting a 3-1/2 month high of 0.86528 francs on trading platform EBS. The Swiss franc has been broadly under pressure since Tuesday when the Swiss National Bank imposed a floor on the euro/Swiss franc pair at 1.2000 francs.

The greenback was up 0.1 percent to 77.32 yen . Selling by Japanese exporters is seen capping the pair below 77.50 yen, while wariness about official intervention supported the dollar. All of this saw the dollar index up 0.15 percent at 75.581.

Sterling fell to a two-month low of $1.5914 on growing speculation the Bank of England may resort to more asset purchases at the end of a two-day policy meeting on Thursday to support a flagging economy.

Copyright Reuters, 2011