The euro near high as thin trade exaggerates moves
The euro hovered near its high for December against a broadly weaker dollar on Tuesday, after surging the previous day on solid buying from accounts including Asian central banks that overwhelmed hedge fund sales.
One trader said, however, that the euro could struggle to extend its gains much after its jump on Monday triggered a wave of stop-loss buying and forced some traders to lighten their euro short/dollar long positions ahead of the Federal Reserve’s policy meeting later on Tuesday.
Monday’s sharp moves highlight the thin and choppy year-end trading conditions that are likely to persist as more and more investors close their books for the upcoming holidays.
“Many players are absent, leaving the market driven by short-term trading,” said a trader at a European bank in Tokyo.
The dollar’s decline also followed an abrupt drop in U.S. Treasury yields and Moody’s warning that it could move a step closer to cutting the U.S. triple-A credit rating.
Improved appetite for riskier assets on growing optimism about the U.S. economy, and China keeping interest rates on hold, in the end all conspired to push the greenback down more than 1 percent against a basket of major currencies.
“It looks like it was more a squeeze of positioning than anything else. Particularly in the euro because we know the market is well short,” a trader at a U.S. investment bank said.
The euro rose 0.2 percent from late U.S. trade to $1.3413, a little firmer on the day but off Monday’s high of $1.3434. The trader said he expected it to struggle above $1.3400, and its December 6 high of $1.3452 is also seen as near-term resistance.
A break of $1.3452 would take it to a three-week peak, though persistent worries over the debt of peripheral countries in the euro zone means it faces an uphill battle to clear that point.
Indeed, the European Central Bank stepped up its purchases of government bonds last week, although the amount was still well below levels reached last spring.
Hideki Amikura, a forex manager at Nomura Trust and Banking, said he expected the euro to keep falling in the longer term toward parity against the dollar.
But he added that strength in the German economy could be expected to counter the effect of debt worries from time to time, making the euro highly volatile.
“Germany has had negative interest rates for quite a long time. German manufacturers are doing very well now and the DAX index has been rising sharply. That should certainly worry (European Central Bank policy maker and Bundesbank head Axel) Weber,” he said.
The dollar was little moved against the yen at 83.48 yen after shedding 0.6 percent on Monday.
“The dollar is under pressure as Treasury yields, especially in the medium-term zone, have dropped quite significantly ahead of the FOMC meeting,” said Gen Kawabe, manager at Chuo Mitsui Trust and Banking.
Many traders expect strong support at around 83 yen, though heavy offers are lined up at 84.40-50 yen, a level the currency failed to break on Monday yet again after multiple failures since late last month.
BOND BUYERS EMERGE
Buyers for U.S. bonds emerged after benchmark Treasury yields surged to six-month highs on Monday. This helped knock the 10-year yield down to 3.28 percent from 3.39 percent.
The yields fell even as Moody’s said if U.S. President Barack Obama’s tax and unemployment benefit package became law, in a plan agreed last week, debt levels could rise lifting the likelihood of a negative outlook on the rating.
The Federal Reserve policy board meets later on Tuesday and is expected to reaffirm its quantitative easing policy even while acknowledging the better run of data recently.
Commodity currencies shone on record high copper prices and gains in other metals such as gold.
The Australian dollar put on nearly 1.5 cents on Monday to come close to testing parity, although the trader expected resistance ahead of parity to cap it. It was last at $0.9960, near a one-month high of $0.9983 hit on Monday.
The Aussie rose above NZ$1.3250 for the first time since late 2000, with the kiwi dollar coming under pressure after New Zealand retail sales slumped in October, leading the market to further push out the timing of any hike in interest rates.
Source: Reuters