The euro held steady on Monday, supported by expectations the European Central Bank will detail plans this week to stem the debt crisis, but vulnerable to the risk of disappointment and flagging growth prospects. The growth-linked Australian dollar fell to fresh six-week lows against the dollar and the yen as investors sold after signs of economic weakness in China and weak Australian data.
The euro stood at $1.2570, flat from late US trade on Friday and off an eight-week peak of $1.2638 set that day after a speech by Federal Reserve President Ben Bernanke fanned expectations of further stimulus to revive growth. Traders cited option barriers at $1.2650, with resistance at the July 2 high of $1.2681. Trade was slow with US markets closed for a holiday.
The euro was underpinned by expectations the ECB will unveil a bond buying programme, probably at its policy meeting on Thursday, aimed at lowering borrowing costs for peripheral euro zone countries such as Spain and Italy. That is expected to lower the risk premia - the additional cost over low-risk securities - of holding European assets as well as the euro.
"While the euro could rally to the $1.2670/80 region as short positions are trimmed, we are likely to see investors sell into it as there is a great of deal of uncertainty about what the ECB may announce on Thursday," said Jeremy Stretch, head of currency strategy at CIBC World Markets.
The ECB is likely to downgrade growth forecasts this week, adding to pressure for a cut in interest rates in coming months. Data on Monday showed German and French factory activity contracted in August. ECB President Mario Draghi skipped last week's Jackson Hole symposium to try to smooth over a deep rift within the ECB over the bond scheme that is increasingly being played out in public.
However, investors expect Draghi will prevail over opposition to the programme, notably from Germany's Bundesbank. Reflecting this, speculators have for several weeks cautiously trimmed bets on the euro falling. Data from the US financial watchdog showed on Friday that speculators have cut their bets against the euro to the smallest since April. The dollar was under pressure against the yen after Bernanke's speech. It last stood at 78.36 yen, near the three-week low of 78.187 hit on Friday. But there was strong support for the dollar at 78 yen with Japanese importers looking to buy the US currency at lower levels, traders said.
Bernanke said high unemployment is a grave concern and that the Fed would act as needed to strengthen the recovery, though he did not explicitly signal an imminent move, providing temporary relief to the US dollar. A below-forecast US jobs report this Friday could bolster expectations of looser monetary policy and weigh on the dollar in the run-up to the Fed's September 12-13 policy meeting, traders said.
"However, we see strong support for the dollar at 78 yen and we think the Bank of Japan will try and counter any Fed action with further easing of its own when it meets the following week," said Ned Rumpeltin, G-10 currency strategist at Standard Chartered Bank.
Meanwhile, the Australian currency fell to a near six-week low against the US dollar, hit by a double whammy of weak Chinese and poor domestic data. The Aussie slid to a low of $1.0240, retreating from Friday's high of $1.0355.
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