Wednesday, October 26, 2011

Euro wary as summit looms

SYDNEY: The euro and commodity currencies stayed under a bit of pressure early in Asia on Wednesday, Oct 26 having lost some of their gloss as markets geared up for what could be a disappointing outcome at a keenly awaited European Union leaders' summit.

Markets had clung to hopes that EU leaders would announce a comprehensive plan to tackle the region's debt crisis at Wednesday's summit. But news that a meeting of European finance ministers had been canceled fueled fears that any accord could lack details.

There has also been a stream of reports underscoring deep divisions between euro zone members on how to tackle the crisis, all but dashing hopes of a grand solution.

Still, the euro's decline from a six-week high of $1.3959 has been pretty shallow. It stood at $1.3906 after finding initial support at the overnight low of $1.3847.

"Since little is now expected out of today's summit, the market impact should be limited," analysts at BNP Paribas wrote in a note, adding that positioning in the spot and options markets suggests that investors are already bearish on the euro.

"In fact, given the recent price action and market reaction to mere speculation, a sheer commitment from policymakers may be enough to ignite a fresh risk rally. $1.4000 before the weekend remains viable," they said.

One of the reasons for the euro's modest pullback was fresh negative news on the U.S. economy, which reinforced market expectations of more stimulus from the Federal Reserve.

This was especially so after two key Fed members recently voiced the possibility of action to shore up the housing sector.

Latest data showed house prices were unchanged at low levels in August and consumer confidence unexpectedly dropped to its lowest level in two-and-a-half years in October.

That saw the dollar dip to a fresh record low against the yen at 75.73 yen, keeping alive the threat of intervention by Japanese authorities. The dollar has since edged back up to 76.08.

Business daily Nikkei reported the Bank of Japan will discuss additional monetary easing measures to control the impact of a rising yen on the economy when its policy board convenes for a meeting on Thursday.

Also under pressure, the Canadian dollar suffered a huge drop after the Bank of Canada quashed expectations of interest rate hikes and downgraded its growth forecasts, citing Europe's debt crisis and weakness in the country's top trading partner, the United States.

The U.S. dollar jumped to C$1.0214 from below parity and last stood at C$1.0160. The Aussie surged to C$1.0636, reaching highs not seen in around 14 years.

For the Aussie, the key focus will be on consumer inflation data due at 0030 GMT. The Reserve Bank of Australia has signaled that a benign number could open the door to an interest rate cut as soon as at next week's policy meeting.

Analysts polled by Reuters expect underlying inflation to come in at 0.6 percent in the third quarter. Such a moderate outcome would bolster the case for a 25-basis-point easing, while a rise of 0.8 percent or more might make it hard to justify a cut.

Against the dollar, the Aussie was at $1.0428, down from this week's peak of $1.0502 set on Monday. - Reuters

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