Euro heads back toward three-month lows

[May 28, 2014] By Patrick Graham

LONDON, (Reuters) - The euro traded within sight of a three-month low on Wednesday as expectations solidified for a multi-pronged attack on monetary policy by the European Central Bank next week.

A number of banks have been reluctant to continue to sell the euro ahead of the central bank's policy meeting, speculating that the scale of action it takes to bolster the economy - and reduce euro zone interest rates - may yet disappoint markets.

But comments this week by ECB President Mario Draghi were read as confirming the bank is on course to ease policy significantly. Many banks now expect cuts in more than one of its main rates as well as targeted steps to force more credit into the economy.

"It does feel like something is finally beginning to change on the euro," said Neil Mellor, a strategist at Bank of New York Mellon in London.

"A lot is riding on Draghi's shoulders, but if he does confirm expectations (of strong action) then we could see the euro slide deepen."

The euro was down 0.1 percent on the day at $1.3623 EUR=EBS, just 10 pips off a three-month low of $1.3612 plumbed on Tuesday.

Mellor pointed to the slowing of a rally in debt prices across the euro zone's indebted southern periphery as evidence that capital inflows to Europe may be slowing.
 

But the single currency has also drawn support from a number of other factors this year including China's intervention to weaken the yuan and the subsequent recycling of the dollars it purchased in doing so into euros.

The Chinese currency CNH= fell further on Wednesday after its biggest daily loss in a month against the dollar a day earlier, hit by negative news from the property sector.

Top residential property developer China Vanke Co Ltd 000002.SZ said the days of rapid growth in the real estate sector were over, indicating a government clampdown on speculative investment and easy credit has gained traction.

DOLLAR BOOST

The dollar held steady near an eight-week peak against a basket of major currencies, having edged up on encouraging U.S. economic data.

The dollar index last stood at 80.404 .DXY, staying near a high of 80.470 set on Tuesday, its highest level since early April.

Dollar bulls took heart after data on Tuesday showed orders for long-lasting U.S. manufactured goods unexpectedly rose in April and consumer confidence perked up in May. (Full Story)

Against the yen, the dollar held steady near 101.85 yen JPY=, staying within sight of a near two-week high around 102.14 yen that had been set on Tuesday.

"I think it's okay to stick with a basic stance of buying (the dollar) on dips," said a trader for a Japanese bank in Singapore.

While Japanese exporters may sell the dollar going into the month-end, those flows are not as large as they once were, the trader said.

On the other hand, there has recently been talk of some yen-selling interest among Japanese investors, he said, adding that flows out of Japan could help support the dollar versus the yen.

Japan's trade deficits are seen as a supportive factor for the dollar versus the yen over the medium term, as they suggest that net foreign exchange flows generated by the country's exports and imports are tilted toward yen-selling.

(Editing by John Stonestreet)

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