FOREX-Euro pins hopes on ECB; yen retreats
Wednesday, 29 February 2012

* Euro, commodity currencies holding firm

* Yen on track for biggest monthly fall in 11 years vs euro

* Focus on ECB cash injection, Bernanke's testimony

By Masayuki Kitano

SINGAPORE, Feb 29 (Reuters) - The euro and commodity currencies edged higher on Wednesday as hopes that European banks will take up a large offer of cheap three-year cash from the European Central Bank bolstered risk appetite.

The euro inched up 0.1 percent to $1.3476, having climbed 0.5 percent on Tuesday. It held near a 2-1/2 month peak around $1.3486 set on Friday and was on track to end the month up 3 percent, its best performance since October.

The Australian dollar rose 0.4 percent to $1.0813, nearing a six-month high of $1.0845 hit in early February

"Given the expectation we will see a generally healthy take up in the LTRO, it should keep risk assets well supported," said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong.

"There is a slight risk that you might see a buy-on-rumour, sell-on-fact outcome," he added.

While the ECB event is pretty much priced in, traders said a bigger-than-expected injection of cash into the banking system could further shore up market confidence, a risk euro bears are only too aware of.

A Reuters poll of 30 euro money market traders on Monday showed they expect the ECB to allot 500 billion euros at this week's longer term refinancing operation (LTRO), with forecasts ranging from 200 billion to 750 billion euros.

The ECB money is seen as helping to ease bank funding strains and could underpin the region's sovereign bond market. This should buy more time for officials to tackle the debt crisis, which now faces an Irish referendum on the European Union's new fiscal treaty.

A 'no' vote would damage long-term funding prospects for the country, creating more uncertainty for the region.

YEN SLIPS

The worst performer this month is undoubtedly the yen, which is set to post its biggest fall in 11 years on the euro and over two years against the greenback.

The yen slipped again on Wednesday, with strong dollar bids by Japanese importers at the 0100 GMT Tokyo helping to give a lift to the dollar, said a trader for a Japanese bank in Tokyo.

The dollar rose 0.2 percent versus the yen to 80.59 yen , having hit a nine-month high of 81.661 yen earlier this week on trading platform EBS.

The euro climbed 0.3 percent against the yen to 108.61 yen . The single currency hit a four-month high of 109.95 yen earlier this week.

The Japanese currency has come under broad pressure since the Bank of Japan's surprise policy easing earlier in the month, and the yen's drop picked up steam after it fell below a series of support levels.

A widening in U.S.-Japan interest rate differentials in the dollar's favour and dollar-buying by Japanese importers have also helped lift the dollar versus the yen.

The dollar has risen about 5.7 percent versus the yen in February, on track for its biggest monthly percentage gain since December 2009, while the euro has climbed around 8.9 percent against the yen, in what would be its largest monthly rise since December 2000.

In addition to the outcome of the ECB's cash injection, another focal point on Wednesday is U.S. Federal Reserve Chairman Ben Bernanke's semi-annual testimony on monetary policy before the House Financial Services Committee.

"If the Fed chairman emphasises the weakness in investment over recent stronger employment data, that could be telling. In any event, we doubt that Mr. Bernanke will want to put anyone off the scent of more easing steps should economic conditions warrant," BNP Paribas analysts said.

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