June 6, 2018 / 2:58 AM / a month ago

FOREX-Euro holds firm; NAFTA worries hit Canadian dollar, Mexican peso

* Euro boosted by report ECB may call end of QE

* Speech by Italian PM Conte mixed blessing for euro

* C$, Mexico peso hit by fears US may abandon NAFTA

* A$ up 0.5 pct after Australia GDP

By Hideyuki Sano

TOKYO, June 6 (Reuters) - The euro held firm on Wednesday as investors started to focus on the European Central Bank’s policy meeting next week, while concerns that the United States could pull out of a trade pact with Canada and Mexico hit the peso and the Canadian dollar.

The euro traded at $1.1724, having gained about 0.5 percent so far this week and hovering about two cents above its 10-month low of $1.1510 set on May 29.

Market players said the euro got a boost on Tuesday after Bloomberg, citing sources, reported that the ECB could conclude its next policy meeting this month with a public announcement on when its quantitative easing program would end.

Many traders have thought the ECB would seek to avoid causing a ripple at its next policy meeting on June 14 given the uncertainty caused by the Italian political situation.

The report followed a speech by Italy’s new Prime Minister Giuseppe Conte, whose promise of radical change had mixed blessings for the euro.

While his reassurance that leaving the euro was not on his agenda helped to underpin the common currency, the new government’s tax cuts and higher welfare spending plan lifted Italian bond yields, undermining investor confidence.

“The market will start to focus on the ECB from now on. Politics in Italy and Spain will play second fiddle as we now have new governments in both countries,” said Kazushige Kaida, head of foreign exchange at State Street Bank.

The euro hit a two-week high of 128.95 yen in early Asian trade on Wednesday.

The dollar traded at 109.85 yen, having risen to 110.01 yen the previous day. It has extended a recovery from a five-week low of 108.115 yen on May 29 on easing concerns about political instability in Europe.

But the U.S. currency has been unable to extend its rally beyond 110 yen.

“Recent U.S. economic data such as payrolls and ISM surveys were impeccable. But despite that, the dollar has so far failed to rise much further. That seems to suggest strong selling interest,” said a senior trader at a major Japanese bank.

“Markets are starting to focus on the ECB’s tapering. That would probably mean a tough summer for global equity markets. And we should expect the U.S. to take a hard line on tariffs. We should be prepared for risks in June and July,” he added.

The British pound was firm at $1.3401, having gained 0.62 percent on Tuesday on strong UK service sector survey, also extending its recovery from a six-month low of $1.3205 set on May 29.

The Australian dollar rose after the country’s GDP data beat market expectations.

The Aussie stood at $0.7660, up 0.6 percent on the day, and near six-week high of $0.7665 touched on Monday.

The Canadian dollar and the Mexican peso came under renewed pressure after White House economic adviser Larry Kudlow said on Tuesday that President Donald Trump is considering holding separate talks with Canada and Mexico.

That added fuel to speculation the United States could scrap the North American Free Trade Agreement (NAFTA).

The Canadian dollar had fallen to a 2-1/2-month low of C$1.3068 per U.S. dollar on Tuesday, though it edged up in Asia on Wednesday after a media report that Treasury Secretary Steven Mnuchin is said to have urged Trump to exempt Canada from tariffs.

The Mexican peso hit a 15-month low of 20.4705 peso to the dollar on Tuesday and last stood at 20.4075.

Mexico has slapped tariffs on American products ranging from steel to pork and bourbon in retaliation against import duties on metals imposed by Trump.

The peso has fallen more than 12 percent from a near seven-month high on April 17.

Elsewhere the Brazilian real fell 1.8 percent to 3.81 per dollar as a poll showed increased polarization ahead of October presidential elections, with far-right lawmaker Jair Bolsonaro leading the ballot followed by centre-left populist Ciro Gomes.

The South African rand stood at 12.75 per dollar after having fallen 1.7 percent on Tuesday after dismal GDP data. South Africa’s economy shrank by 2.2 percent in the first quarter of 2018, its worst quarterly contraction since early 2009. (Editing by Kim Coghill & Simon Cameron-Moore)

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