Euro steadies below $1.10 before ECB meets

[October 17, 2016]  By Patrick Graham

LONDON (Reuters) - The euro steadied on Monday ahead of a meeting of the European Central Bank (ECB) on expectations that officials are beginning to consider reining in the volume of extra emergency aid they give to the euro zone economy next year.

The dollar has had its best fortnight for more than a year against a basket of currencies  up 2.5 percent since the start of October -- but the shift upwards in U.S. bond yields behind that move looks to be running out of steam.

On the European side of the equation, the ECB is still expected at some stage to announce an extension of its quantitative easing program beyond next March.

But there is speculation that the bank, like many of its peers, is at least beginning to question the wisdom of an endless policy of money-printing and ultra-low interest rates that keep downwards pressure on the euro.

"The market broadly sees that the ECB is going to be somewhat more positive on the outlook for Europe this week," Citi's G10 FX strategist in London, Richard Cochinos, said.

"They still will need to announce more accommodative policy next year, but it does seem that they may also believe the need for ever greater accommodation is decreasing. That is leaving the euro positive on the (non-dollar) crosses."

The euro, which fell below $1.10 for the first time in almost three months last week, gained 0.1 percent in early London trade.

The dollar index was down less than 0.1 percent at 97.970 <.DXY> after touching 98.158, its highest since March 10.

Another big element of the past fortnight's rise has been a retreat in the yen from levels around 100 per dollar. The U.S. currency was flat at 104.135 yen <JPY=> on Monday after rising as high as 104.480 on Friday.

The dollar took support on Friday from strong U.S. retail sales and producer price data for September, another sign that the U.S. economy regained momentum in the third quarter after a lackluster first half.

Speculators lifted favorable bets on the dollar for a third straight week, with net longs hitting their highest in more than eight months, according to Reuters calculations and data from the Commodity Futures Trading Commission (CFTC) released on Friday.

The CFTC data showed speculators cut yen net longs to 45,000 contracts from about 70,000 the week before, reflecting the growing conviction that the U.S. Federal Reserve will raise interest rates in December.

The morning's biggest mover among the majors was again sterling, back under pressure less than a cent above last week's lows of $1.2090 and down 0.6 percent against the euro.

After Bank of England Governor Mark Carney indicated the bank was not indifferent to the exchange rate on Friday, Deputy Governor Ben Broadbent again pointed to its willingness to let the currency fall if it cushioned the economy from Brexit-related stresses.

"Given the new market dynamic we ... recommend selling GBP initially to 1.20 and further and for the euro to break above 0.92 pence," Nomura analyst Jordan Rochester said in a note.

(Additional reporting by Shinichi Saoshiro; Editing by Louise Ireland and David Goodman)

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