FOREX-Euro eases before ECB, vulnerable to further losses

Thu Dec 6, 2012 3:09pm IST

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* Euro slips from recent highs against dollar
    * ECB likely to keep rates on hold, lower growth outlook
    * ECB rate decision at 1245 GMT

    By Anooja Debnath
    LONDON, Dec 5 (Reuters) - The euro slipped against the
dollar and yen on Thursday, with investors wary of the single
currency on expectations the European Central Bank may lower
growth forecasts for the region.
    The ECB is widely expected to keep interest rates on hold --
it announces its decision at 1245 GMT -- but is likely to
present a grim outlook for the euro zone economy in 2013 and
offer clues on its future policy path..
    Any hint of further rate cuts could see the euro give up
some of its recent gains and could target this week's low of
around $1.2970. 
    The euro traded at $1.3060, retreating from
Wednesday's seven-week high of $1.3127. Traders said speculators
were cutting euro positions before the ECB decision, with
reported option barriers at $1.3150 looking safe for now.
    "We've seen something of a reversal in confidence. Looking
ahead, the ECB is unlikely to cut rates but most likely to
underline the ongoing weakness in the euro zone economy," said
Jeremy Stretch, head of currency strategy at CIBC World Markets.
    "Confirmation that the euro zone remains in recession is
certainly not providing any underlying support for the euro."
    There was an outside chance the ECB may surprise with a rate
cut and strategists said that was also weighing on the single
currency. If the central bank kept rates unchanged the euro
could see a fleeting rise.
    The euro will, however, probably hold its ground against the
dollar over the next month but a persistently weak euro zone
economy will drag it lower next year, according to a Reuters
poll of economists. 
    Concerns about the U.S. fiscal debate also tempered the
euro's gains, as it tends to weaken in times of uncertainty.
There was little sign of progress in the talks, aimed at
avoiding the "fiscal cliff" on Wednesday..
    The euro was trading at 107.85 yen, off a 7-1/2
month high of 107.95 yen it hit on Wednesday.       

    YEN OUTLOOK    
    The yen's longer-term outlook was undermined by expectations
of further pressure on the Bank of Japan to take further
monetary easing steps following an election on Dec. 16.
    The yen was flat against the dollar at 82.50 yen,
well shy of its 7-1/2 month high of 82.84 yen hit last month,
with an options barrier said to lie at 83 yen.
    The latest Japanese polls on Thursday showed Shinzo Abe's
opposition Liberal Democratic Party on track to secure a
majority. 
    "Polls today showed the LDP is expected to do well, which
suggests downside for the yen," said Teppei Ino, currency
analyst at the Bank of Tokyo-Mitsubishi UFJ.
    "Comments from the BOJ's Nishimura yesterday suggested that
the bank is considering further easing even with the election
outcome yet unknown."
    BOJ Deputy Governor Kiyohiko Nishimura said on Wednesday the
central bank would debate whether monetary easing undertaken in
September and October was enough to support the economy.
 
    The expected change of government and prospects of drastic
easing will weaken the safe-haven yen further over the next
year, according to the latest Reuters poll. 
    The Australian dollar hit a session high of
$1.0480, to last trade up about 0.2 percent on the day, after a
surprisingly strong jobs report prompted investors to reduce
expectations of further policy easing.
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