The euro dipped versus the dollar on Tuesday and pulled back from a one-month high, but remained supported by expectations that the European Central Bank will take action soon to lower borrowing costs for Spain and Italy. The Australian dollar hit its highest level in more than four months after the central bank kept interest rates unchanged at 3.5 percent and dropped few hints that it was in a hurry to ease again.
Hopes that the ECB will soon act to reduce crippling Spanish and Italian borrowing costs have sparked a global rally in risky assets since Friday and given a lift to the euro as well as the Australian dollar. Although details of exactly how the ECB will stabilise the eurozone's bond markets have yet to be fleshed out, traders and analysts say the euro may eke out further gains in the near term due to hopes for such action.
The euro eased 0.2 percent to $1.2380, having hit a one-month high of $1.2444 on Monday on trading platform EBS, its highest level since early July. "I think the risk or the bias here is perhaps a bit more short squeeze in the euro to the upside," said Sim Moh Siong, FX strategist for Bank of Singapore, referring to the possibility of the euro getting a lift if traders with short positions in the single currency unwind their bearish bets.
The euro is likely to face initial resistance at around $1.2450 to $1.2480, and if it breaks above that area, the single currency could try for levels above $1.2600, he added. There was some market talk of an option barrier in the euro at $1.2450. The existence of such a barrier suggests that options players may sell the euro if it climbs close to the barrier, but also means the euro's rise could gain steam if the barrier level is actually hit.
The Australian dollar rose to as high as $1.0603, its highest level since March 20, after the Reserve Bank of Australia (RBA) kept its main cash rate steady, saying it was too soon to gauge the full impact of past interest rate cuts. The Aussie dollar last stood at $1.0567, steady from late US trade on Monday.
The RBA's reference to the Australian dollar in its accompanying statement caught the attention of some analysts. The central bank said the Australian dollar's exchange rate remains high despite a drop in the terms of trade. "It seems to be a new line from them, that there may be more of a divide between underlying fundamentals and the strength in the exchange rate," said Todd Elmer, currency strategist at Citi in Singapore. The US dollar edged up 0.1 percent to 78.29 yen, staying above a two-month low of 77.90 yen struck last week.