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FOREX-Euro holds below recent peaks; Aussie dips before RBA

Published 04/04/2011, 11:01 PM
Updated 04/04/2011, 11:04 PM
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* Euro takes breather from recent rally

* Euro hovers below resistance at $1.4283 Nov peak

* Aussie dips on profit-taking; awaits RBA

* Aussie positioning suggests some downside risk-trader

By Natsuko Waki

TOKYO, April 5 (Reuters) - The euro hovered below a five-month high against the dollar and an 11-month peak versus the yen on Tuesday as investors assessed whether it can make fresh gains given that expectations of interest rate rises have been largely priced in.

The European Central Bank is expected to raise rates by a quarter point from a record low of 1 percent at a meeting on Thursday to rein in inflationary pressures, with two more 25 basis point hikes priced in by year-end .

But the single currency has already risen more than 6 percent against the dollar and more than 10 percent versus the yen this year, making investors reluctant to buy more ahead of the meeting this week.

The euro's rally has stalled right below resistance at its November high of $1.4283. That level is also crucial as it roughly coincides with trendline resistance drawn from the euro's record high set in July 2008.

"For the ECB, an April interest rate hike is a done deal and one or two more hikes are priced in. It's hard to see a positive surprise from here," said Masafumi Yamamoto, chief FX strategist at Barclays Bank.

"Still, the euro zone would be the first to raise interest rates, which supports the euro. Expectations for diversification flows from higher oil prices are also positive. There is also a risk that the Fed minutes may show a hawkish tone."

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The euro fell 0.2 percent from late U.S. trade on Monday to $1.4188 , pulling away from a five-month high of $1.4269 hit on Monday on trading platform EBS.

A rise above its November peak of $1.4283 could open the way to $1.4374, the 76.4 percent retracement of the euro's slide from November 2009 to June 2010. Support is seen at $1.4190, with traders citing stops through to below $1.4150.

The euro edged up 0.1 percent against the yen to 119.63 yen , close to its 11-month peak of 120.073 yen hit on Monday.

The dollar rose 0.3 percent to 84.32 yen , edging closer to a six-month peak of 84.735 yen set on Friday. A 200-day moving average at around 83.55 is now seen acting as support.

AUSSIE DIPS BEFORE RBA

The Australian dollar dipped 0.4 percent to $1.0323 , pressured by profit-taking in the wake of its rise to a 29-year high of $1.0422 the previous day. There was talk of both bids and stop-loss offers around $1.0300.

Investors were awaiting the Reserve Bank of Australia's policy decision and statement later on Tuesday. The central bank is seen likely to keep interest rates unchanged at 4.75 percent, given scant signs of a pick up in underlying inflation.

A trader for a Japanese brokerage said market positioning was tilted toward being long the Aussie dollar following its recent rally, pointing to the potential for some downside risk.

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Later on Tuesday, focus will turn to the Fed minutes for more hints on the Fed's policy outlook.

Underscoring the market's focus on Fed speakers, the dollar edged higher against the yen and the euro earlier on Tuesday, following comments from U.S. Federal Reserve Chairman Ben Bernanke.

Currency traders, however, said that the move in the dollar likely was due to the market having been short the dollar rather than anything else.

Bernanke said a recent pick-up in U.S. inflation was driven primarily by rising commodity prices globally, but added that was unlikely to persist. [ID:nN04294041]

After a string of hawkish comments from Fed officials, some U.S. central bankers have struck a more cautious tone.

On Monday, Atlanta Fed President Dennis Lockhart said U.S. inflation was likely to remain moderate and St. Louis Fed Research Director Christopher Waller said the Fed was likely to buy all the bonds it has said it would purchase by June 30. [ID:nN04277975]

Charles Evans, president of the Chicago Federal Reserve Bank, told CNBC on Monday the Fed's programme is most likely an "adequate" size. [ID:nWEN0460]

"It is becoming increasingly evident (there is) a divergence in opinions among Fed members. These different opinions among Fed members may seep into the FOMC minutes later today," BNP Paribas said in a note to clients.

"This may be interpreted as hawkish, but we expect the Fed to stand pat especially since we expect incoming data through Q2 to be on the weaker side." (Additional reporting by Masayuki Kitano in Singapore; Editing by Kim Coghill)

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