Euro firms on ECB expectations, gains seen limited

LONDON: The euro rose versus the dollar on Tuesday on optimism the European Central Bank will unveil a plan to tackle the region's debt crisis this week, although gains were capped by concerns the plan may lack detail.

Strategists said the euro was likely to hold its ground in the run-up to the ECB meeting on Thursday, at which policymakers are expected to announce a bond-buying scheme to help ease funding pressures on indebted euro zone countries.

That speculation was reinforced on Monday when ECB President Mario Draghi said central bank purchases of sovereign bonds of up to three years maturity did not constitute state aid.

 But many analysts said with expectations of ECB action running high there was scope for disappointment that could see the euro slide after the meeting and limit its gains beforehand.

"If we just get the bare bones of what the bond-buying programme will look like we may see a 150 to 200 point fall in the euro," said Adam Cole, global head of FX strategy at RBC Capital Markets.

The euro was last up 0.2 percent at $1.2615, close to a two-month high of $1.26378 hit last week on trading platform EBS. A 200-point fall would take the euro to just above $1.24, a level last seen in mid-August.

Morgan Stanley strategists said they did not expect the euro to push much higher before the ECB meeting and would take profit at their $1.27 target if it was achieved before Thursday.

RBC's Cole also said there was a risk the ECB could choose to cut interest rates, another factor that could push the single currency sharply lower.

Euro weakness against the dollar could be limited in the near term, however, by speculation the US Federal Reserve may launch another bond buying programme, known as quantitative easing, later this month.

Investors are likely to use US non-farm payrolls data due on Friday to help gauge the strength of the economy and the likelihood of further easing, and could be reluctant to push the dollar much higher before the release.

"I don't see a big drop in euro/dollar from here, given the anticipation ahead of the Fed meeting," said Mitul Kotecha, head of global FX strategy for Credit Agricole in Hong Kong.

The euro touched a two-month high against the Australian dollar at A$1.2328 at one point, and rose 0.4 percent against the yen to 98.93 yen.

AUSSIE SEEN VULNERABLE

Traders said Japanese importers were seen buying the dollar against the yen, helping the dollar rise 0.2 percent to 78.41 yen.

The Australian dollar edged higher after Australia's central bank kept interest rates unchanged at 3.5 percent as widely expected.

 The Aussie rose 0.2 percent to $1.0265, up from a low of $1.0224 hit earlier on Tuesday, its lowest in nearly six weeks.

With the Reserve Bank of Australia expected to lower interest rates once more by year-end and some commodity prices looking vulnerable to a slowdown in China, many market players said the Australian dollar should head lower in coming months.

Daniel Martin, Asia Economist for Capital Economics in Singapore, said it could fall to around $0.95 by year-end even if the Fed launches another round of quantitative easing, or QE3, after its policy meeting next week.