FOREX-Euro pressured as ECB easing expectations push yields lower

Reuters

* Euro wallows near 6-week lows versus dollar

* Sterling in spotlight after slumping overnight (Updates prices, comment)

By Shinichi Saoshiro

TOKYO, May 15 (Reuters) - The euro wallowed near six-week lows against the dollar on Thursday, weighed by lower government debt yields amid rising expectations the European Central Bank is poised to cut rates at next month's meeting.

A dovish ECB has helped push down yields on German and U.S. government debt, with the benchmark U.S. 10-year note yield slipping to a six-month low on Wednesday.

The German Bunds and U.S. Treasury yield moves are often correlated even though the U.S. economy is seen growing faster than Europe, which is expected to eventually send Treasury yields higher.

Reuters on Wednesday quoted sources as saying the ECB is preparing a package of policy options for its June meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms (SMEs).

The euro hit a 2-1/2 year high of $1.3995 against the dollar last week but heightened speculation of ECB easing, in part spurred by central bank officials expressing concern over the currency's strength, knocked the single currency to a six-week low of $1.3688 on Tuesday.

It was fetching $1.3719, little changed from late New York trade on Wednesday and within striking distance of that six-week trough.

"Except for quantitative easing, which it likely won't resort to for a while, the ECB does not have a lot of easing options at its disposal to keep the euro down," said Masafumi Yamamoto, market strategist at Praevidentia Strategy in Tokyo.

"Therefore it will have to keep sending a steady message, saying it will ease a step at a time. The various ECB officials will also have to march in unison and convey the same message, especially with the dollar also showing signs of weakness," he said.

The market is eyeing the euro zone first-quarter GDP and April CPI data due later in the session for immediate cues.

The dollar slipped 0.1 percent to 101.85 yen after losing 0.35 percent on Wednesday, tracking the fall in Treasury yields.

It briefly fell to the day's low of 101.66 yen after news Japan's economy grew in the January-March quarter at its fastest pace more than two years, but its descent was short-lived.

"Strong economic indicators tend to be associated with expectations of Bank of Japan foregoing further easing, so there may have been a knee-jerk reaction," said Kyosuke Suzuki, director of forex at Societe Generale in Tokyo.

"But there are firm bids for the dollar in the middle 101-yen range and participants are wary of that too, keeping movements confined in range."

The British pound was also in the spotlight after it slumped overnight when the Bank of England surprised markets by saying it had no plans for tightening monetary policy in the near term.

The BOE said Britain's economic recovery remained in its early stages, although it noted a strong bounce-back in the job market and lowered its forecast for unemployment over the next couple of years.

Against the pound, the euro traded at 81.80 pence, after rebounding on Wednesday from a 16-month low of 81.26 pence.

Sterling traded at $1.6773, not far from a one-month low of $1.6753 hit Wednesday.

(Editing by Shri Navaratnam and Eric Meijer)

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