Euro, sterling on defensive as central bank action eyed

Euro, sterling on defensive as central bank action eyed

By Ian Chua
SYDNEY | Wed Jul 4, 2012 
(Reuters) - The euro wallowed near one-week lows on Thursday, struggling to find any traction ahead of a widely expected interest rate cut by the European Central Bank.
The single currency traded at $1.2522 early in Asia, having fallen around 0.7 percent on Wednesday in trading made subdued by a U.S. holiday. Surveys showing all of Europe's biggest economies are in recession or heading there added to the gloom.

Support is seen around $1.2495, the 76.4 percent retracement of Friday's dramatic rally sparked by an EU deal to tackle the region's debt crisis.

Traders said part of the euro's weakness overnight was due to heavy selling against the Swedish crown,
which surged to an 11-1/2 year high after the Swedish central bank kept interest rates on hold at 1.5 percent.

Traders said the absence of stronger hints on future rate cuts by the Riksbank saw the crown squeeze higher, pushing the euro down some 1 percent to as far as 8.6495 crowns, lows not seen since late 2000.

The euro also lost ground on the yen, slipping to 100.06 from Wednesday's session high of 100.65. It hit a fresh all-time low on the New Zealand currency at NZ$1.5541. Softness in the single currency saw the dollar index .DXY bounce to 82.199, off Friday's trough of 81.430.

Against the yen, the greenback held firm at 79.92, continuing to slowly recover from a low of 79.08 set last Friday.

With expectations mounting that the ECB, Federal Reserve and also the Bank of England will have to do more to stimulate their respective economies, the market continued to favor high-beta currencies.

The Australian dollar, already lifted by upbeat retail sales data on Wednesday, was at $1.0270, having climbed as high as $1.0320 -- its best level since early May.

The ECB is due to announce its decision at 1145 GMT, followed by a news conference at 1230 GMT. A Reuters poll of economists showed the majority expect the ECB to cut its main rate by 25 basis points to 0.75 percent. They were evenly split on whether the ECB will lower its deposit rate.

A reactivation of the ECB's bond-buy plan, however, is seen unlikely for now, although it is the tool many investors would like it to use to cap the bond yields of countries embroiled in the euro zone crisis.

Barclays Capital analysts expect the ECB to lower its main rate by a more aggressive 50 basis points and see a quarter point cut as well to the deposit rate to zero.

"We suggest that selling the EUR and buying a relatively 'high beta' currency, such as the AUD, would perform well in light of a more aggressive ECB response to the problems," they wrote in a note.

The BOE is expected to launch a third round of monetary stimulus as it moved to counter a recession and the effects of a worsening debt crisis in the euro zone.

That is weighing on sterling, which has fallen to $1.5592, down more than a full U.S. cent from Friday's peak.