Euro treads water ahead of ECB policy meeting

[TOKYO] The euro struggled to break out against the US dollar and yen Thursday ahead of a European Central Bank policy decision, with disappointing German factory output fanning fears about the EU's largest economy.

With the outlook for the eurozone still tepid, and with lingering uncertainty caused by Britain's vote to leave the European Union, analysts warned the ECB could cut its outlook on the bloc.

"We think there is a good chance we get a downgrade to the growth and inflation outlook," said Rodrigo Catril, a currency strategist at National Australia Bank.

"As a result, the risk is that (ECB chief Mario) Draghi may hint at an extension of the asset purchase programme which is due to end in March." He said such a move would be "euro negative".

The single currency bought US$1.1246 and 114.20 yen in Tokyo, against US$1.1242 and 114.36 yen in New York Wednesday when it retreated on news German August industrial production slipped 1.5 per cent from July.

The US dollar slipped to 101.48 yen from 101.73 yen after the Federal Reserve's Beige Book report on the economy said growth was "modest" in July and August.

The comments follow a series of below-par readings on jobs, factory activity and the services sector that have poured cold water on the chances of an interest rate hike this month, which in turn is pressuring the US dollar.

Traders were unmoved by news that Japan's economy grew only slightly more than first thought in the second quarter.

While the 0.2 per cent on-quarter growth was a slight improvement on the previous zero reading they were still well below the previous three months' figures.

"It's getting better but the economy is lacking a growth engine and overall the outlook is pretty bleak," said Kohei Iwahara, a Japan economist at French bank Natixis.

Japan's latest figures will throw the spotlight on the central bank, which meets later this month, as markets try to guess if it will launch more economic stimulus.

Bank of Japan policymakers disappointed at its late July meeting when they opted to leave a record 80 trillion yen (S$1.06 trillion) annual bond-buying programme unchanged.

At a Tokyo seminar this week, BOJ governor Haruhiko Kuroda left the door open for more stimulus and waved off talk of scaling back on its easing policy when the bank holds its next policy meeting from Sept 20.

But he stopped short of signalling the policy board's intentions, leaving investors guessing.

AFP