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Dollar holds steady but euro struggles on inflation concerns

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[August 26, 2014]  By Anirban Nag

LONDON (Reuters) - The dollar held steady on Tuesday after its recent gains but the euro continued to struggle, pinned down near 19-month lows against the Swiss franc on expectations of soft inflation data and more monetary easing.

Weak German economic figures and the resignation of the French government following a row over fiscal policy added to the bearish mix for the euro.

The shared currency was trading at 1.2080 Swiss francs,  having fallen to 1.2072 francs on Monday, its lowest since early January 2013 on trading platform EBS.

Its drop could test the Swiss National Bank's three-year old pledge to cap the franc at 1.20 per euro.

"I haven't heard anything about the SNB changing its commitment to the 1.20 floor and I don't expect it to," said Marshall Gittler, head of currency strategy at IronFX Global.

"That means the risk/reward ratio for long euro/Swiss franc positions is about as good as it gets right now. The rate can go somewhat lower and of course the SNB is not required to notify investors before changing its strategy. But past performance ... does suggest they will keep the rate above 1.20."
 


Against the dollar, the euro was subdued at $1.3198, having dropped to $1.3178 in Asian trade, its lowest in nearly a year. Following dovish comments from the European Central Bank chief at the weekend, German business sentiment data on Monday sagged for a fourth month running.

Investors betting on more euro weakness are now waiting for euro zone inflation data on Friday. Analysts polled by Reuters expect annual inflation to have slowed to 0.3 percent in August from 0.4 percent in July. That would be well below the ECB's danger zone of 1.0 percent and its target of just under 2.0 percent.

Late on Friday, in stronger language than he has used in the past, ECB President Mario Draghi said the ECB was prepared to respond with all its "available" tools should inflation drop further.

Those comments have triggered speculation that the ECB may be prepared to ease policy further, driving bond yields to lows.

CONTRASTING PICTURE

In contrast to Draghi, Federal Reserve Chair Janet Yellen on Friday acknowledged the concerns of some Fed officials about the sustained level of monetary policy stimulus, even as she stressed the need to move cautiously on raising rates.

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While that meant higher short-term U.S. rates would bolster the dollar's allure, it comes amid the spectre of slowing growth in the euro zone, making the bloc's assets less attractive to investors.

"Over the past year, the euro has remained firm because investors have had a great inclination to increase their European portfolio holdings as the ECB has successfully stabilised the euro zone," Robert Bergqvist, chief economist at SEB, wrote in his Nordic Outlook report.

"This factor is now fading in strength, which will later lead to a continued weakening of the euro against the dollar. We expect the euro at $1.30 at the end of 2014."

The dollar index slipped as investors booked profits after two days of gains in the wake of Yellen's comments at Jackson Hole. It held close to its September 2013 peak of 82.671. A break there will take it back to highs not seen since July last year.

Against the yen, the dollar dipped 0.2 percent to 103.85, having peaked at a seven-month high of 104.49 overnight.

Investors will look to U.S. durable goods orders data later in the day, with forecasts for a 7.5 percent rise in July from a month earlier. Traders said if U.S. yields rise on stronger-than-expected data, it could push the dollar higher.

(Editing by Hugh Lawson)

[ 2014 Thomson Reuters. All rights reserved.]

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