Euro on the defensive as ECB eyed

The euro staggered near two-year lows on Thursday, finding few friends in a market that is wagering the European Central Bank will be forced to inject even more stimulus into the sputtering euro zone economy.

While a full-blown quantitative easing programme after Thursday’s policy review is unlikely, some believe the ECB may lay the groundwork for such a move early next year.

Keeping pressure on the ECB to do more, a survey on Wednesday showed euro zone business activity grew less than thought last month, suggesting the bloc’s economy may be on the verge of contracting again.

Euro remains steady

The euro was steady on the day at $1.2309, having fallen to $1.2301 on Wednesday, a low not seen since August 2012. It has clearly broken through the bottom of a $1.2360/1.2600 range seen in the past three weeks, a bearish sign for the currency.

Yet traders said the ECB must meet the market’s already very dovish expectations or risk sparking a short-covering rally that some analysts said could see the euro squeeze back above $1.2600.

“We think the Council is more likely waiting to see the TLTRO2 uptake on December 11, before making any decision on expanding its asset purchase programmes, which could potentially occur in Q1 2015,’’ said Greg Moore, strategist at RBC Capital Markets, referring to the ECB's targeted-liquidity operations.

Dollar vs yen

The dollar touched another seven-year high against the yen, rising as far as 119.94 yen and getting ever closer to the psychologically key 120.00 yen level.

The dollar last traded at 119.92 yen, up 0.1 percent on the day.

The dollar remains well supported against the yen, helped by the US economy’s outperformance, said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore.

Japanese media projections showing that Prime Minister Shinzo Abe’s coalition may keep its two-thirds majority in the lower house of parliament in general elections on December 14, were also “mildly supportive’’ for the dollar versus the yen, Henderson said.

‘Abenomics’

Abe is seeking a fresh mandate for “Abenomics’’, his push to revive the economy through a mix of hyper-easy monetary policy, government spending and reforms.

“It would be much more of a threat to dollar/yen if the polls had turned down against him materially because that in turn would be a threat to the macro economic policies that he has pursued,’’ Henderson said.

The dollar held steady against a basket of currencies at 88.967, having set a 5-1/2 year high of 89.005 on Wednesday.

The Australian dollar set a four-year low of $0.8382 and last traded at $0.8387, down 0.2 per cent on the day.

The Aussie dollar gained a slight reprieve after Australian retail sales data came in better than expected but its bounce after the data was short-lived and it later sagged back down.

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