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FOREX-Euro firm after ECB decision, but vulnerable to Draghi
March 7, 2013 / 1:11 PM / 5 years ago

FOREX-Euro firm after ECB decision, but vulnerable to Draghi

* Euro rises as Spain hits top end of target at bond sale
    * Stays vulnerable to hints of policy easing by ECB
    * ECB seen holding rates when decision announced at 1245 GMT
    * Dollar index hovers just below 6-1/2 month high

    By Anirban Nag
    LONDON, March 7 (Reuters) - The euro rose on Thursday,
helped by healthy demand at a Spanish debt auction which eased
some investor concerns about the euro zone, but it was
vulnerable to losses if the European Central Bank flagged
interest rate cuts.
    The currency showed no clear reaction after the ECB, as
expected, kept its benchmark rate unchanged at 0.75 percent,
with investors focused on a press conference with central bank
president Mario Draghi that starts at 1330 GMT.
    The ECB is expected to lower its inflation and growth
forecasts, giving Draghi room cut rates and support the
recession-hit economy in coming months.
    The euro was up 0.4 percent on the day at $1.3025. It
had risen to a session high of $1.3045 after Spain sold 5
billion euros of bonds, hitting the top end of its targeted
amount at reduced borrowing costs despite political uncertainty
in Italy. 
    But the currency looked susceptible to losses and could
retest last week's near three-month low of $1.2966, below which
it could fall to December's low of $1.2876. Resistance was cited
at $1.3126, the euro's 100-day moving average.
    Traders said any gains towards $1.3100 would draw more
sellers given investors are snapping up the dollar on the back
of good U.S. economic data and bets the Federal Reserve may halt
its asset purchase programme towards the end of the year.
    "We will be getting new forecasts from the ECB and if there
is a downgrade to inflation and growth forecasts, it could set
the stage for a rate cut in the second quarter," said Ned
Rumpeltin, head of G10 currency strategy at Standard Chartered.
    "We are bearish on the euro on a fundamental basis and if
Draghi sounds dovish, we could see it dropping towards $1.2875.
A more neutral stance may see a rebound but this should remain a
short-lived technical rebound."
    Morgan Stanley strategists said they expect the euro to
decline towards the $1.2880/50 area initially and then towards
their $1.2660 target, given downside risks that the euro zone
economy faces.
    Most analysts say even if borrowing costs for highly
indebted euro zone countries like Spain and Italy do not rise,
on a more fundamental basis the struggling economy will need a
more accommodative monetary policy stance along with a weaker
currency to boost growth.
    "The Spanish auction shows there is still demand (for its
debt) which is positive and a little bit surprising considering
what is happening in Italy," said Richard Falkenhall, currency
strategist at SEB. 
    The euro pared gains against sterling, which
rebounded from near 2-1/2 year lows against the dollar 
to $1.5075 after the Bank of England decided not to resume its
quantitative easing programme. 
    Many investors had built bets against the pound in recent
weeks on expectations that a grim UK economic outlook will
prompt the BoE to pump in more liquidity. The BoE's bank rate is
at a record low of 0.5 percent.
    The euro's and sterling's rise against the dollar saw the
dollar index slip from 6-1/2 month highs.
    The index, which measures the dollar's performance
against a basket of currencies, was last down 0.1 percent at
82.391, having risen to 82.604, its highest since Aug. 20, in
late Wednesday trade. It has rallied more than 4 percent from
this year's trough of 78.918 plumbed on Feb. 1. 
    Against the yen, the dollar was up 0.3 percent at 94.38
, moving closer to a 33-month peak of 94.77 reached on
Feb. 25. 
    Earlier on Thursday, the Bank of Japan kept monetary policy
unchanged, but the yen weakened against the dollar on
expectations of aggressive easing in the future. Some
strategists have revised their forecasts to show sustained yen
    UBS changed its end-2013 forecast for the dollar to 100 yen
from 85 yen.

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