FOREX-Euro inches up vs dollar in face of pressure on the upside

Reuters

* Euro steadies after two weeks of decline

* Euro zone PMI data in focus this week

* Fed minutes, China PMI, Japan trade data awaited this week

By Lisa Twaronite and Ian Chua

TOKYO/SYDNEY, May 19 (Reuters) - The euro edged up slightly versus the dollar on Monday after two punishing weeks as investors waited for fresh data, with its upside pressured by growing expectations of easier policy in the euro zone.

The euro added about 0.1 percent to $1.3702, nursing losses of over 1 percent suffered in the past two weeks and moving away from a nadir of $1.3648 touched on Thursday. That was its lowest level since late February, in response to data showing the euro zone grew much less than expected at the start of the year.

The common currency has crumbled under mounting expectations that the European Central Bank (ECB) will ease policy next month, and investors are increasingly betting on a weaker euro.

Data from the Commodity Futures Trading Commission released on Friday showed 2,175 net short contracts on the euro as of the week ended May 13, from net long positions of 32,551 the previous week.

"There seems to be so many reasons to short the euro," said Bart Wakabayashi, head of forex at State Street Global Markets in Tokyo. "The ECB seems to be the one [central bank] under the most pressure to act the soonest."

Five senior sources have told Reuters that the ECB is preparing a package of policy options for the June 5 meeting, including cuts in all its interest rates and targeted measures, aimed at boosting lending to small and mid-sized firms.

This means euro zone purchasing managers surveys due later in the week will be closely watched, traders said.

"Given the low euro zone inflation, interest will be on the input/output price subcomponents of the PMIs," analysts at Commonwealth Bank wrote in a note to clients.

But against the yen, the euro fetched 138.99, edging slightly down, and back toward a three-month low of 138.77 yen marked on Friday.

The yen had a muted reaction to Japanese core machinery orders data, a leading indicator of corporate capital spending, which marked a record surge in March and were seen rising in the current quarter, although the series is notoriously volatile.

Japanese business confidence waned this month, suggesting a drag from last month's sales tax increase, but the mood is seen rebounding in months ahead, a Reuters poll published on Monday showed.

On Wednesday, investors will be watching Japanese trade data, expected to show only a moderate rise in exports despite a weaker yen.

If external demand continues to threaten Japan's nascent economic recovery, the Bank of Japan might be forced to ease policy again in the coming months.

Investors also await minutes later this week of the Federal Reserve April 29-30 policy meeting, as well as a private survey on China's manufacturing sector for May.

The dollar index stood at 80.017, down slightly on the day after notching up a modest 0.2 percent gain last week, when it touched a six-week peak of 80.338 on Thursday.

Against the Japanese currency, the greenback fetched 101.44 yen, down about 0.1 percent and not far from a two-month low of 101.31 yen set on Thursday.

Commodity currencies were sluggish as well with the Australian dollar just a touch lower at $0.9355 following a flat week. Traders said the 94 U.S. cent level is still providing a cap for the Aussie for now.

(Editing by Shri Navaratnam and Eric Meijer)

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