SENSEX NIFTY
Sep 06, 2012, 06.40 PM IST | Source: Reuters

Euro hits two-month high after ECB keep rates steady

The euro rose on Thursday after the European Central Bank left interest rates unchanged, but gains looked fragile on concerns the bank's plan to stem the debt crisis, set to be announced later in the day, may fall short of expectations.

The euro rose on Thursday after the European Central Bank left interest rates unchanged, but gains looked fragile on concerns the bank's plan to stem the debt crisis, set to be announced later in the day, may fall short of expectations.

The single currency rose to USD 1.2652, its highest since early July, from around USD 1.2615. Some in the market had been bracing for an interest rate cut by the ECB to support flagging growth in the euro zone.

"This is the conventional reaction since there were people who were expecting a rate cut," said Daragh Maher, strategist at HSBC. "No rate cut means a higher currency and a few stops got cleared at USD 1.2640. But the market is really waiting for what Draghi has to say."

The euro rallied on Wednesday after a string of leaks from euro zone officials made markets more confident that the ECB President Mario Draghi will back up his pledge to do "whatever it takes" to save the euro.

Two central bank sources told Reuters on Wednesday Draghi would give no details of planned amounts or explicit targets for spreads or interest rates.

Most market players saw limited gains for the euro even if the ECB gave more details than expected. The single currency has risen from a two-year low of USD 1.2042 struck in late July on speculation Draghi will unveil a new bond-buying program to curb high Spanish and Italian borrowing costs.

But with expectations running high, many market players warned there was scope for profit taking and disappointment, given Draghi may be unable to disclose specifics of the plan.

"I think Draghi will disappoint in the respect he will not give us a fully-fledged list of details which would allow us to assess the risks or the chances of his program," said Ulrich Leuchtmann, head of FX research at Commerzbank.

"But I don't think we will see a collapse in the euro or a collapse in the Spanish bond market because we are only missing details."

Leuchtmann said if Draghi's news conference at 8:30 a.m. EDT (1230 GMT) did fall short of expectations the euro could test the previous day's low of around USD 1.2501 before finding support.

Citi strategists said in a note the euro could rally temporarily beyond USD 1.2650, while one London-based FX trader said he would take profit on any rally around USD 1.2710.

A German Constitutional Court ruling on the euro zone bailout fund is scheduled for September 12, meaning many investors would be wary of initiating large positions before then.

SWISS FRANC FALLS

Earlier, the euro hit a one-month high of 1.2063 francs on trading platform EBS on the first anniversary of the Swiss National Bank's decision to impose a floor on that pair and curb the Swiss currency's gains.

The franc has fallen sharply against the euro in the past two sessions on market talk that the SNB has been buying euros to protect the 1.20 francs floor. The SNB has declined to comment.

An interest rate cut by the Swedish Riksbank pushed the single currency against the Swedish crown to a seven-week peak of 8.5520 crowns.

The euro's broad rise saw the dollar index .DXY dip to 81.061, near a 3-1/2 month low of 80.964 hit on Friday.

The dollar held steady at 78.42 yen, within its familiar range around 78.50 yen.

Sterling was steady at USD 1.5910, near Wednesday's 3-1/2 month high of USD 1.5940, after the Bank of England kept interest rates steady and its quantitative easing program unchanged, as expected.

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