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CURRENCIES

Euro eases as investors await central bank moves

London

FOREIGN exchange markets paused on Monday as investors wait to see by how much and how fast policymakers might ease policy, beginning with the European Central Bank on Thursday.

The euro edged down towards US$1.12 as the US dollar gained the upper hand, thanks mostly to safe-haven demand amid rising tensions in the Middle East.

The Swiss franc hit a new two-year high against the euro, touching 1.1010 francs per euro. The Swiss currency has benefited from investors looking for refuge from worries about the eurozone economy.

Data published last week indicated that investors remain net long of US dollars, unchanged from the previous week, with the US currency having weathered rising expectations for interest rate cuts from the Federal Reserve relatively well.

Currency markets have been stuck in narrow trading ranges in recent weeks, with expectations for easing by both the Federal Reserve and the ECB more or less cancelling out the impact on the euro and the dollar.

Pricing for a 50-basis-point Fed cut soared last week after a dovish speech by New York Fed president John Williams. Those expectations later dwindled after a Fed spokesman clarified that the remarks did not refer to "potential policy actions".

Priced-in forecasts for a 50-basis-point cut have dropped from as high as 71 per cent last week to 18.5 per cent on Monday, with a 25 bps cut now seen as more likely.

"FX markets don't tend to get too excited about monetary policy when it's all nuance and forward guidance, but when central banks are making actual rate moves and QE adjustments, monetary policy becomes the driving theme," BMO Capital Markets strategist Stephen Gallo said.

The Fed holds its monetary policy meeting next week, as does the Bank of Japan.

The euro nudged lower to US$1.1217 after earlier reaching US$1.1208. The US dollar index rose 0.1 per cent to 97.203.

Analysts said the US dollar was benefiting from geopolitical tensions surrounding a confrontation in the Strait of Hormuz, the oil trade's most important waterway.

The US dollar rose 0.1 per cent against the yen to 107.89 after earlier breaching the 108 level.

Despite the US dollar's recent resilience, some analysts think the US currency is set for a fall.

"The USD looks to have peaked. We see medium-term downside on narrowing interest rate differentials and relative growth prospects that could be accelerated by US intervention to weaken the currency," Citi analysts wrote in a research note.

"We anticipate a modest appreciation of the EUR over the longer term, but considerable risks exist if QE (quantitative easing) is accelerated." REUTERS