Euro inches lower vs dollar, focus on Bernanke


The euro eased against the dollar on Monday, with the near-term focus on whether U.S. Federal Reserve Chairman Ben Bernanke will give any hint of additional monetary stimulus when he gives testimony to Congress in coming days.

The Australian dollar dipped but held on to the bulk of the gains it made on Friday when it drew strength from data showing that China, the main buyer of Australian exports, posted second quarter GDP growth of 7.6 percent, matching expectations.

Moves in major currencies were subdued with Tokyo markets closed for a public holiday on Monday and as investors anxiously awaited Fed Chairman Bernanke’s testimony before Congress on Tuesday and Wednesday.

“I think he certainly will keep the door open. But I don’t think that he will indicate the Fed are any more closer to QE than they were at the last FOMC meeting,” said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong.

The Fed last month expanded efforts to keep long-term interest rates low by announcing it would buy an additional $267 billion in long-term bonds while selling short-term securities in a measure known as Operation Twist.

The central bank, however, held off from launching a third round of outright bond purchases that would expand its balance sheet, a form of stimulus known as quantitative easing.

“He’ll certainly suggest that it’s possible, but…markets may just come away a little bit disappointed,” Kotecha said.

If so, the dollar could gain a lift against both the euro and the yen, analysts said.

The euro dipped 0.1 percent to $1.2239, staying above a two-year low of $1.2162 hit on Friday on trading platform EBS.

The dollar fell 0.2 percent against the yen to 79.09 yen, hovering near support at around 79.04 yen, its 200-day moving average.


One factor that may bode ill for the euro is the fact that both German and Dutch two-year bond yields have turned negative recently, said Gareth Berry, associate director of G10 FX strategy for UBS in Singapore.

The strength of Germany’s economy has made its highly-liquid bonds a major safe haven from the euro zone’s sovereign debt crisis. Dutch bonds have also enjoyed similar demand as investors flocked to bonds of euro zone countries in relatively good fiscal health.

“The trouble with this is that over the last two years, what has saved the euro from considerable downside pressure is that there has been a lot of rotation out of peripheral, stricken sovereigns into core Europe,” Berry said.

“Capital preservation was effectively guaranteed by doing that… However, now that yields have gone negative, you do have to worry about that,” he said, adding that investors would suffer losses if they were to hold such bonds until maturity.

“As a result we could see a retreat out of euro zone assets by international investors in particular,” Berry said.

Elsewhere, the Australian dollar eased 0.1 percent to $1.0229, giving back a slight portion of its gains on Friday, when it climbed roughly 1 percent.