Euro stalls near 7-week high, Aussie still fragile

SYDNEY, Aug 29 — The euro steadied near its seven-week peak on Wednesday, after getting swept higher by a wave of short covering overnight, while the Australian dollar languished at one-month lows on persisting worries about Chinese growth.

Traders said news that European Central Bank President Mario Draghi was too busy to attend Friday's Jackson Hole meeting of central bankers renewed hopes he could announce a long-awaited plan to tackle the region's debt crisis at the ECB's Sept. 6 policy meeting.

The single currency stood at US$1.2557 (RM3.9190), after gaining more than half a per cent to reach a high of US$1.2577 on Tuesday, coming close to seven-week peak of US$1.2590 hit last week.

Against the yen, the euro drifted up to 98.68 yen, not far from last week's 1 1/2-month high of 99.185 yen.

The euro's gain also came after both Italy and Spain saw their borrowing costs fall at debt auctions on Tuesday, an encouraging sign for Milan's more challenging long-dated debt sale on Thursday.

However, news out of Europe was not all rosy with figures showing the Spanish economy had fallen deeper into recession and the country's most economically important region, Catalonia, said it needed a major rescue from Madrid.

Some market players also questioned whether Draghi's decision to skip a visit to Jackson Hole is a good sign.

"Is it really a good sign that a central bank governor suddenly cancel his plan? The market may be reading it wrong. It could be because he has some urgent issues to deal with," said Kimihiko Tomita, forex manager at State Street, noting that the ECB data showed private-sector deposits at Spanish banks fell at a record pace in July.

Still, the rebound in the common currency saw the dollar index fall back towards a two-month trough of 81.221 last Thursday.

The dollar has also been undermined by speculation that US Federal Reserve Chairman Ben Bernanke, in his speech at Jackson Hole, could give a clear hint that the Fed might start a new asset-purchase programme soon.

But some market players say he may just repeat what he has said, that the Fed has room to act, which would likely leave the market guessing until the Fed's polity meeting on Sept. 12-13.

Volatility remains low

In fact, the currency option market is placing limited premium on contracts covering Friday, suggesting players expect only minor price action on Bernanke's speech.

Even beyond Jackson Hole, options are not pricing in a surge in market volatility, with one-month euro/dollar volatility still below 10 per cent despite heavy event schedules in September.

On top of the ECB's Sept. 6 meeting, the market will be looking at the German constitutional court's ruling on euro zone bailout funds on Sept, 12, a euro zone finance ministers' meeting on Sept. 14 and a report on Greece by international lenders later in the month.

"The fact that volatilities are just slightly higher than the market lull during the Olympics suggests that market players are not putting a high event premium," said an option trader at a Japanese bank.

Against the yen, the dollar was steady at 78.60 yen.

The Australian dollar continued to wallow near one-month lows. The Aussie stood at US$1.0375, near one-month low of US$1.0345 hit on Tuesday.

The Aussie plumbed an eight-week trough against the euro, which reached AUS$1.2123. The single currency has gained around 4.5 per cent since hitting a record low around AUS$1.1597 early this month.

A confluence of factors has conspired to knock the Aussie lower in recent days including the slowdown in China, Australia's single biggest export market, and worries about the longevity of the country's mining investment boom. — Reuters




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