Euro weak near eleven-and-a-half-year low as ECB's QE plan awaited

[March 05, 2015]  By Anirban Nag

LONDON (Reuters) - The euro hovered near a 11-1/2 year low against the dollar on Thursday as investors waited for the European Central Bank to announce more details of its massive bond-buying program.

The euro fell to $1.1026 in Asia, its lowest since early September 2003. It last traded at $1.1060, down 0.15 percent on the day, barely reacting to the ECB's decision to keep interest rates unchanged.

The euro has lost 8.5 percent this year as investors braced for the start of the ECB's asset purchases this month.

ECB President Mario Draghi is expected to detail the 1 trillion euro quantitative easing (QE) scheme at 8.30 a.m. ET.

The ECB's staff forecasts for the economy are also expected and growth prospects are likely to be upgraded. Inflation forecasts, however, could be tweaked lower, analysts said.

Markets will be looking to see how the asset purchase program will work, when the buying will start, whether it applies to paper with negative yields and how the purchases will be distributed along the yield curve.

A key concern for currency investors is whether the ECB can buy 60 billion euros of assets per month. Many local European investors are unlikely to sell because they have a tough time replacing the assets with anything offering a similar yield.

But foreigners could be more willing to sell, take profits and invest the proceeds in gilts or treasuries. That should weigh on the euro, analysts said.

"The latest move (in the euro) suggests a vote of confidence that the ECB's QE program will at least succeed in weakening the currency," said Marshall Gittler, head of FX strategy at IronFX Global.

Dutch bank ING said in a note that the divergence in the outlook for monetary policies in the United States and the euro zone would add to the downward pressure on euro versus the dollar.

Investors have already driven yields across Europe to record lows in anticipation of the ECB's largesse, widening the yield advantage of the U.S. dollar in the process.

While there is much uncertainty over when the U.S. Federal Reserve will start raising rates, some analysts expect it to drop the word "patient" in its forward guidance at its March 17-18 policy meeting, paving the way for a possible policy tightening in June or later.

The dollar hit a fresh 11-year high against a basket of major currencies. The dollar index rose to as high as 96.286, its strongest level since September 2003.

Against the yen, the dollar rose 0.4 percent to 120.20 yen with traders citing buying by U.S. macro funds keen to cover their short dollar positions.

(Editing by Jon Boyle)

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