FOREX-Euro rises on Barroso comments, ECB could support
Discussion started by MarzG , on 06 October 09:42 AM

* Barroso comments on recapitalising banks push euro to session high

* Rates seen on hold, liquidity measures likely from ECB

* Euro spikes versus Swiss franc, traders cite media report

By Nia Williams

LONDON, Oct 6 (Reuters) - The euro climbed versus the dollar on Thursday after a top euro zone official said policymakers are proposing coordinated action to recapitalise banks, raising expectations the region's banking sector would be ringfenced from the Greek debt crisis.

The euro was last up 0.3 percent on the day versus the dollar, near a session high of $1.3397. It jumped sharply following European Commission President Jose Manuel Barroso comments, and stops were cited above $1.3420.

Investors were also focused on the European Central Bank meeting where policymakers are expected to provide longer-term funding to banks and keep interest rates on hold.

But there was some speculation of a rate cut and that uncertainty meant some investors were more likely to go into the announcement at 1145 GMT with positions squared.

Some market players were reluctant to initiate fresh positions ahead of ECB President Jean-Claude Trichet's last policy meeting. He could pave the way for a cut before year-end, even if rates are kept on hold at 1.5 percent today.

"We expect there will be no rate cut today which should be some kind of support for the euro as long as the market does not come to the conclusion the ECB is behind the curve and not taking action quickly enough," said Lutz Karpowitz, currency analyst at Commerzbank.

Calls for a cut have grown louder amid signs the euro zone economy is deteriorating further and as Greek default fears weigh heavily on confidence in the bloc's banks.

In a Reuters survey taken last week, 56 out of 75 economists said they expected the ECB to hold rates this time around, though 13 saw a 25 basis-point cut and 7 predicted a 50 basis-point cut.

Analysts said other measures to support Europe's banking system could include more liquidity, bringing back the ECB's 12-month tender last used at the end of 2009, and possibly the resurrection of its programme for buying covered bonds.

A trader at a Japanese bank said if there was no cut, but additional measures like more liquidity are flagged, the euro could rise, taking out stop losses between $1.3400 and $1.3450.

A decisive break above that level could pave the way for a correction towards $1.3680 -- the 38.2 percent retracement of the late August to early October slide from $1.4550 to $1.3145, a nine-month trough struck this week.


Optimism that Germany was taking steps to safeguard the financial sector and improved U.S. economic data provided some support for the single currency after a volatile week in which the French and Belgian governments pledged to rescue troubled bank Dexia .

European finance ministers have agreed to safeguard banks, which could face heavy losses if a planned second bailout package for Greece does not go ahead, but analysts said event risk for the euro remained high.

"The crisis is far from over and I'm still negative on the euro looking beyond the ECB," said Minori Uchida, senior analyst at the Bank of Tokyo-Mitsubishi UFJ, adding that the currency may eventually drift below $1.30 in the coming days.

The single currency jumped to a four-month high of 1.2430 Swiss francs . Traders cited media reports quoting a senior Swiss official as saying a higher exchange rate floor in euro/Swiss would be better for the economy.

Sterling fell 0.2 percent versus the dollar to $1.5438 ahead of a Bank of England rate decision, also on Thursday, amid talk policymakers may open the way for more quantitative easing.

Once ECB and BoE rate decisions are out, market attention is likely to focus on the U.S. economy. A good number from Friday's U.S. non-farm payrolls could set the stage for a rally in risk assets.

The dollar index came off a nine-month high of 79.838 earlier in the week to last trade at 79.055. The greenback was steady against the yen at 76.71 , off a three-week peak of 77.26 struck on Monday. (Additional reporting by Antoni Slodkowski; editing by Anna Willard)


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