Euro steadies after recent gains, focus on ECB comments

[September 03, 2015]  By Anirban Nag

LONDON (Reuters) - The euro steadied on Thursday, having rallied 1.5 percent on a trade-weighted basis since China devalued the yuan last month, with the focus on whether the rise could prompt the European Central Bank (ECB) to sharpen its language and talk it down.

ECB President Mario Draghi will address a news conference at 1230 GMT (8.30 a.m. EDT), having left interest rates unchanged. The bank is set to cut its inflation forecasts and will probably promise to beef up its bond-buying program if growth prospects flag.

China's slowing economy and worries about global growth have prompted investors to increase bets on the safe-haven yen and the low-yielding euro. Both had been popular for funding carry trades involving the sale of these currencies to buy higher-yielding, but riskier, currencies and assets.

The unwinding of these risky carry trades has boosted the euro, much to the discomfort of the ECB. The euro trade-weighted index is near its highest since mid-January, offsetting some of the ECB's effort to try to get euro zone inflation to 2 percent by flooding the system with euros through its 1 trillion euro asset buying program.
 

A firmer currency lowers the cost of imports and tends to drag down headline inflation. Against the dollar, the euro was flat at $1.1230, having risen to a high of $1.1332 earlier this week. The euro was slightly lower against the yen at 135 yen.

"The downside risk to the inflation path, the latest fall in risk assets and a rise of the trade-weighted euro do point towards dovish language during the press conference," said Petr Krpata, currency strategist at ING.

Dovish language from the ECB should underpin overall risk sentiment and help the dollar, which has in the past few weeks moved in tandem with global stocks.

The dollar was slightly lower at 120.22 yen, rebounding sharply from a low of 119.255 overnight. The dollar index was flat, having earlier hit a three-day high of 96.046.

Global stocks extended gains on Thursday after receiving a lift from reports of fresh measures against brokerages in China, whose financial markets are closed on Thursday and Friday for holidays.

Traders expect the closure of Chinese markets to reduce volatility in markets before the U.S. non-farm payrolls report due on Friday. Forecasts are for 220,000 jobs being added last month and the jobless rate at 5.2 percent.

"The bar for a dollar positive surprise from the payrolls data has likely shifted higher above 230,000 given concerns that ongoing volatility will prevent a hike in September," Citi analysts said in a note.

Meanwhile, the Swedish crown surged to a six-week high of 9.3755 crowns per euro after Sweden's central bank kept rates unchanged.

(Editing by Keith Weir and Susan Thomas)

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