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Euro slips against dollar, Fed eyed

Monday, September 10 14:27:17

The euro slipped against the dollar today as investors adjusted positions ahead of a Federal Reserve policy meeting later this week, with expectations high that the U.S. central bank could announce another round of stimulus.

Despite Monday's losses, the euro remained close to the almost four-month high touched on Friday, when disappointing U.S. jobs data fanned speculation the Fed may launch another round of quantitative easing this week.

Under the QE program, the Fed prints money to buy bonds, which depresses Treasury yields, encouraging investors to seek higher returns elsewhere. An increase in the money supply erodes the value of the dollar.

"Risks continue to loom large this week, but we would suggest the most significant event for the euro will be the FOMC meeting on Thursday," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.

The Fed will announce its rate decision and issue a policy statement at the close of the two-day meeting of its Federal Open Market Committee on Thursday.

The euro on Monday was down 0.2 percent at $1.2787, still near Friday's high of $1.2817, which was its strongest level since May.

Sentiment toward the single currency improved after the European Central Bank last week unveiled a plan to cut borrowing costs for its most indebted countries, although some speculators took profit on the euro's recent rally.

Analysts cautioned that with Dutch elections and a German constitutional court ruling on the euro zone permanent bailout fund also due this week, investors would be wary of pushing the single currency much higher.

Westpac said in a note the euro may rise to $1.30 in the near term after last week's soft jobs report bolstered expectations of more easing by the Fed.

Westpac said risks around the German constitutional court's pending decision on whether the rescue fund can go ahead were exaggerated. It expected a favorable ruling on the fund, albeit with some restrictions. Dutch election risks were also waning as recent polls showed a tilt back toward pro-European parties, all of which could see the euro target $1.33-1.34, it added.

Even so, analysts said the single currency remained vulnerable to developments in Spain, which may have to ask for a bailout, and Greece, whose foreign lenders rejected parts of an austerity package prepared by the government. (C ) Reuters