NEW YORK: The euro declined against the dollar on Wednesday, reversing some of the previous session's gains, though losses were limited with some investors betting the European Central Bank will yet act decisively to tackle the debt crisis.
Major currencies held in tight ranges as investors awaited a key speech by Federal Reserve Chairman Ben Bernanke on Friday at the Fed's annual symposium in Jackson Hole, Wyoming. Any hints of more monetary easing from the US central bank could weigh on the dollar.
ECB chief Mario Draghi said in a newspaper opinion piece on Wednesday that the bank needed to employ "exceptional measures," bolstering speculation it was working on a plan to buy bonds to lower peripheral euro zone states' borrowing costs.
Market moves were also affected by thin trading in the final week of the North American summer, analysts said.
"Markets are quiet with a slight bias to shed risk," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto. "Paralysis ahead of Jackson Hole and extreme event risk in early September are the key themes."
The euro slipped 0.3 percent to $1.2527, having hit a session high of $1.2573 on Reuters data after Draghi's comments. That took it close to last week's peak of $1.2589, its highest since early July.
The ECB meets on Sept. 6 and strategists said investors will likely wait to see details on any bond-buying program before adding euros to their holdings.
The German Bundesbank opposes bond buying, but ECB policymakers are working overtime to ease its fears.
"The hope in the market is that big steps are going to be taken in September that are going to alleviate the strains in the sovereign debt market," said Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi in London.
"On top of that, there's the Fed element to throw in. A large portion of the market is expecting QE3 in September."
The euro has rallied in recent weeks since Draghi said he would do "whatever it takes" to preserve the currency. It has also made solid gains against the dollar since Fed minutes last week suggested more monetary easing could follow "fairly soon".
With some in the market trimming long dollar positions in anticipation of more Fed easing, the chance of disappointment is high. If Bernanke does not hint at any near-term easing, the dollar could rebound and push the euro lower, traders said.
Other analysts said new stimulus measures may not take the form of bond buying aimed at lowering yields.
"If QE3 is announced, we should expect the US dollar to take a severe beating, especially against the euro and the Japanese yen," said Christopher Vecchio, currency analyst at DailyFX in New York. "However, if any form of new QE is announced which doesn't suppress the yield curve, the US dollar could actually gain."
In the euro zone, the German constitutional court rules on the region's bailout funds on Sept. 12, euro zone finance ministers meet on Sept. 14 and a report on Greece by its international lenders is due by early October.
Bank of Tokyo-Mitsubishi's Halpenny said the risk of disappointment from any of these events was high, and recommended selling the euro if it climbed close to $1.28.
US data on Wednesday showed the US economy grew at a 1.7 percent annual rate in the second quarter, as expected, and slightly better than last month's 1.5 percent estimate.
A separate report showed contracts to buy previously owned homes in July rose to their highest level since April 2010, suggesting the housing market recovery was gaining traction.
"In terms of Fed policy, I think it can afford the Fed a little bit of leeway to conserve its remaining firepower so under that scenario, that can be supportive for the greenback," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington, D.C.
Some market players said Bernanke may just reiterate that the Fed has room to act. That could leave the market guessing until the Fed's next policy meeting on Sept. 12-13.
The currency options market is placing a limited premium on contracts covering Friday, suggesting players expect only minor price reaction to Bernanke's speech.
Even beyond the Jackson Hole meeting, options are not pricing in large swings, with one-month euro/dollar volatility still below 10 percent despite heavy event schedules next month.
The dollar rose 0.2 percent to 78.67 yen.
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