Euro steady before US, euro zone policy decisions

LONDON: The euro held steady against the dollar on Wednesday before monetary policy decisions in the United States and the euro zone, with investors gearing up for possible European Central Bank action to stem the region's debt crisis.

But market players were mindful of the risk of disappointment when the ECB meets on Thursday. Bank President Mario Draghi last week boosted the euro and riskier assets by pledging to do everything necessary to preserve the euro.

Analysts said this would make many wary of taking a strong position and was likely to keep the euro trapped in a tight range against the dollar.

First, a US Federal Reserve policy decision is due at 1815 GMT on Wednesday. Analysts expect the Fed will stop short of announcing aggressive measures to tackle a weak economy but nevertheless to signal it is ready to act.

The euro was flat at $1.2306, giving up earlier gains after German Bundesbank President Jens Weidmann said in an internal interview that government overestimated the ECB's capacities and placed too many demands on it.

However, the single currency held above Monday's low of $1.2225. It stayed below a peak hit late last week of $1.2390 on optimism following Draghi's comments.

"If the ECB come up with something very clear-cut we could see a position squeeze (higher) in the euro, depending on how much detail Draghi gives at the press conference," said Ankita Dudani, currency strategist at RBS.

She added that the risks of a positive outcome from the ECB or a disappointment were about 50/50, which was likely to keep trade in euro/dollar "quite muted".

Investors were wary of German opposition to steps including a resumption of the ECB buying government bonds to depress yields.

"The euro could benefit momentarily if the ECB says it will buy bonds. But that will probably provide a good opportunity to sell the euro," said Minori Uchida, chief FX strategist at the Bank of Tokyo-Mitsubishi UFJ in Tokyo.

Many investors, analysts and traders also say the impact of any ECB's action would be temporary without a sustainable economic recovery in battered southern Europe.

But euro zone data painted a gloomy picture for the region, with a business survey showing the region's manufacturing sector contracted for an 11th successive month.

The dollar index was down 0.1 percent at 82.572, hovering above a near four-week low of 82.343 hit last week.

YEN

The US currency earlier hit a two-month low against the Japanese yen of 77.90 yen on EBS trading platform, with traders saying it may have been influenced by month-end flows, before recovering to 78.15 yen. The euro was up 0.2 percent at 96.14 yen.

As the yen is not so far from last October's record high of 75.311 per dollar, market players were becoming wary about the possibility of yen-selling intervention by Japanese authorities.

Earlier, data showing China's official factory purchasing managers' index fell to an eight-month low in July, suggesting the sector is barely growing and prompting demand for the safe-haven yen, analysts said.

Buoyed by gains in equity markets ahead of the week's policy decision, the higher-yielding Australian dollar rose to a four-month high against the US dollar of $1.0543.