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Euro holds but markets fear ECB backlash

Monday, September 03 16:20:05

The euro held steady today, supported by expectations the ECB will detail plans this week to stem the debt crisis, but vulnerable to the risk of disappointment and flagging growth prospects.

The growth-linked Australian dollar fell to fresh six-week lows against the dollar and the yen as investors sold up after signs of economic weakness in China and weak Australian data. The euro stood at $1.2569, flat from late U.S. trade on Friday and off an eight-week peak of $1.2638 set that day after a speech by Federal Reserve President Ben Bernanke fanned expectations of further stimulus to revive growth.

Traders cited option barriers at $1.2650, with resistance at the July 2 high of $1.2681. Trade was slow with U.S. markets closed for a holiday. The euro was underpinned by expectations the ECB will unveil a bond buying programme, probably at its policy meeting on Thursday, aimed at lowering borrowing costs for peripheral euro zone countries such as Spain and Italy. That is expected to lower the risk premia - the additional cost over low-risk securities - of holding European assets as well as the euro, although some strategists say it would not tackle the euro zone's underlying problems. "We are of the view there is scope for disappointment even though the market may initially take it as a positive.

Going forward there are still umpteen problems that will require a weaker euro," said Derek Halpenny, European Head of currency research at Bank of Tokyo-Mitsubishi. The ECB is also likely to downgrade growth forecasts this week, adding to pressure for a cut in interest rates in coming months.

Data today showed German and French factory activity contracted in August. ECB President Mario Draghi skipped last week's Jackson Hole symposium to try to smooth over a deep rift within the ECB over the bond scheme that is increasingly being played out in public. However, investors expect Draghi will prevail over opposition to the programme, notably from Germany's Bundesbank. Reflecting this, speculators have for several weeks cautiously trimmed bets on the euro falling. Data from the U.S. financial watchdog showed on Friday that speculators have cut their bets against the euro to the smallest since April. (C ) Reuters