The euro inched up on Monday after an influential German business survey was not as bad as expected, although it may struggle to retain gains in coming weeks, which could be decisive in the long-running eurozone crisis. The euro may find support against the dollar before US Federal Reserve Chairman Ben Bernanke speaks in Jackson Hole, Wyoming on Friday, but was unlikely to break above a recent seven-week high, analysts said.
Volumes were thin with London shut for a holiday. Germany's Ifo index, the country's most influential indicator of economic health, showed that while the business climate index fell slightly more than expected in August, the current conditions index held up better than forecast.
Nonetheless, the survey suggested tough days ahead for Europe's powerhouse economy, and this would weigh on the euro. However, it eked out gains on expectations of further monetary easing by the Fed and action by the European Central Bank to combat the eurozone debt crisis. "The Ifo numbers do not change the outlook for the euro," said Kasper Kirkegaard, FX strategist at Danske Markets, Copenhagen, adding investors had grown used to soft economic data in recent months.
"Expectations of some sort of policy easing from the Fed and a response from the ECB to drive down borrowing costs are supporting the euro and driving investors to cut down long positions in the dollar." The euro hit a session high of $1.25342 on trading platform on EBS after the Ifo survey was released, up from around $1.2515. It was last trading at $1.2525, up 0.1 percent on the day, helped by steady purchases by a company.
It stayed well below a peak of $1.2590 set last Thursday, its highest since July 4. Traders cited strong offers above $1.2580 and option barriers at $1.2600. Last week's rise in the euro was a result of traders trimming bets against the currency. Expectations the ECB will intervene next month to bring down Spanish and Italian bond yields have helped bolster the euro.
The euro also gained versus the dollar after the minutes of the Fed's most recent policy meeting reignited speculation the central bank could introduce more monetary stimulus. Chicago Federal Reserve President Charles Evans said the US central bank should immediately launch a fresh round of monetary stimulus and buy bonds for as long as it takes to produce a steady decline in the jobless rate.
A speech later on Monday by German ECB Executive Board member Joerg Asmussen, who said last week a Greek exit from the euro zone was manageable but not preferable, will be watched for the ECB's thinking on the crisis, analysts said. The ECB's next policy meeting is on September 6 and Germany's Constitutional Court rules on the eurozone's permanent bailout fund on September 12. Analysts also want to know whether Greece's international lenders will give it more time to meet its budget targets.
Underscoring challenges to a quick solution to the debt crisis, Germany's Bundesbank has likened the ECB's bond-buying plan to a dangerous drug and a conservative ally of the German leader said Greece should leave the currency bloc by next year. "There's a lot of event risk, and I think this event risk will keep the euro capped," said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong. He predicted the euro "will struggle to get above $1.26 this week".
The dollar index, which measures the dollar's value against a basket of currencies, last stood slightly lower at 81.545. It hit a two-month low of 81.221 hit last week. Against the yen, the dollar was flat at 78.65. The Australian dollar skidded to a one-month low of $1.0372 and looked vulnerable to further losses on fresh concerns about China's economy. The Aussie is often used to express views on the world's second largest economy.
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