FOREX-Euro gets reprieve, but policy, growth risks cap upside

Reuters

* Euro squeezes up broadly in thin overnight trade

* Downtrend for EUR/USD still seen intact

* China to unveil reform agenda for next 10 years

By Ian Chua

SYDNEY, Nov 12 (Reuters) - The euro clung onto modest gainsearly in Asia on Tuesday after a lacklustre overnight sessionthat saw investors trim bearish positions in the common currencyfollowing a heavy selloff last week.

Traders said an absence of fresh drivers had prompted themarket to lock in profits, a move that helped the euro drift upto $1.3405 from Monday's low of $1.3345, pulling awayfrom a two-month trough of $1.3295 plumbed Thursday.

It is still about 3 percent lower from a two-year peak of$1.3833 set last month.

Against the yen, the common currency has recovered almostall of the losses suffered on Thursday after the EuropeanCentral Bank wrong footed euro bulls by cutting its main rate toa record-low 0.25 percent. Versus sterling and the Australiandollar, the euro has completely regained Thursday's losses.

"The euro's recovery likely reflects profit-taking on shortsas well as reaction to reports in the press last week suggestinga sizable bloc on the governing council objected to last week'seasing and would presumably lobby against further measures,"analysts at BNP Paribas wrote in a client note.

"We think this latest bounce in the euro is setting uppotentially good opportunities to enter new shorts versus thedollar and sterling, as well as versus the higher yieldingcommodity bloc currencies."

Indeed, analysts expect diverging monetary policy outlooksin Europe and the United States to keep euro/dollar on adowntrend.

A slow economic recovery and risk of deflation in the eurozone mean the ECB is under pressure to take ever more radicalpolicy steps. In contrast, the Federal Reserve is contemplatingscaling back stimulus as the U.S. economy continues to improve.

The euro bought 132.89 yen and A$1.4324, up from lows of 131.22 yen and A$1.4043 plumbedThursday. It fetched 83.83 pence, off a 10-monthtrough of 82.96 plumbed Thursday.

The major focus for sterling this week is the Bank ofEngland's inflation report due on Wednesday. The BOE faces atricky task of upgrading its economic and employment forecasts,while trying to temper market speculation that interest rateswill rise any time soon.

The steadier euro saw the dollar index slip to 81.087from a near two-month peak of 81.482 struck on Friday. Thedollar was little changed against the yen at 99.19,having been confined in a slim 98.92-99.30 range overnight.

Markets were subdued partly due to partial market holidaysin various centres around the world for Armistice day on Monday.

In Asia, investors will be keeping an eye on China where thecountry's leaders will unveil a reform agenda for the nextdecade.

The focus is on economic rebalancing by increasing the urbanpopulation and greater efforts to promote consumption to moveaway from exports and investment, China's main growth engines.Analysts suspect there is little risk of a major surprise.

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