Euro falls first time in four days

The euro dropped against the dollar for the first time in four days on Monday, a direction that could prove to be transitory given elevated expectations that the US Federal Reserve will unveil new stimulus measures to bolster the economy this week. The euro rallied last week to hit an almost four-month high on Friday, when disappointing US jobs data spurred speculation the Fed would launch a third round of quantitative easing, or QE3, at the conclusion of its two-day meeting on Thursday.
Under the QE programme, the Fed prints money to buy bonds, which depresses Treasury yields, with the goal of encouraging investors to seek higher returns elsewhere. An increase in the money supply erodes the value of the dollar. "The Federal Reserve is gearing up to ease and the only question is how far will they go," said Kathy Lien, managing director at BK Asset Management in New York. "How far they will go will depend on how aggressive they want to be. But either way, we don't expect the central bank to stand by idly and do nothing this week just because of the US elections."
Low interest rates for longer than anticipated should also weigh on the dollar, making it a funding currency for buying higher-yielding assets. The euro last traded down 0.4 percent at $1.2758, below Friday's peak of $1.2817, which was its highest level since May.
Sentiment, however, toward the single currency shared by 17 countries has improved markedly as a result of the European Central Bank last week unveiling a plan to cut borrowing costs for its most indebted countries. But analysts cautioned that with Dutch elections and a German constitutional court ruling on the euro zone permanent bailout fund also due this week, investors will be wary of buying the currency. Westpac said in a note the euro may rise to $1.30 in the near term after last week's soft US jobs report bolstered expectations of more easing by the Fed. Even so, analysts said the currency remained vulnerable to developments in Spain, which may have to ask for a bailout, and Greece, whose foreign lenders rejected parts of an austerity package prepared by the government.
In a Reuters poll taken after Friday's jobs report, economists saw a 60 percent chance of the Fed embarking on QE3 this week compared with 45 percent in a late August poll. Against the yen, the US dollar last traded up 0.1 percent at 78.28 yen, just above a one-month low of 78.00 yen hit on Friday.
Analysts said Japanese authorities may start stepping up their rhetoric against the yen's rise if the dollar drops below the early August low of 77.90 yen. There was also a risk the Bank of Japan could ease policy when it next meets to neutralise some of the impact from possible action by the Federal Reserve. "We remain of the view that in the current more favourable market environment and on a risk-reward basis, building long dollar/yen positions on pull-back close to the 78.00 mark is an appealing strategy," BMO Capital Markets said in a note.