Euro On Defensive After ECB Bond Buying Report, Yen Soft

The euro flirted with one-week lows on Wednesday following a Reuters report that the European Central Bank is considering buying corporate bonds, while a recovery in risk appetite underpinned the dollar against the yen.

The euro EUR= briefly fell to $1.2706 its lowest level since Thursday and last stood at $1.2723, little changed from late U.S. levels but still lethargic after 0.7 percent fall on Tuesday.

Several sources told Reuters the ECB is considering buying corporate bonds on the secondary market and may make a final decision as soon as December with a view to begin buying the bonds early next year. 

 The move, if realized, would expand the private-sector asset-buying program the ECB began on Monday, which is aimed at fostering lending to businesses in the hope of spurring growth.

“It seems like quantitative easing by the ECB is within sight,” said a trader at a Japanese bank.

Fresh ECB easing could restore the interest rate gap between Europe and the United States, helping to underpin the dollar.

The dollar rallied in the three months to September on a view that higher U.S. interest rates down the road would attract funds from Europe and Japan, where rates are likely to stay low due to stimulus by their respective central banks.

The U.S. Federal Reserve is expected to wind up its bond buying program at its policy meeting next week. Fed officials are also seeking rate hikes, even though they are likely to wait several months before starting a hiking cycle to ensure the U.S. economy can withstand policy tightening.

While some Fed officials earlier this month flagged a possible global slowdown as a risk to that scenario, solid earnings from U.S. tech firms, upbeat U.S. housing data, and less worrisome economic figures from China on Tuesday all helped to ease that concern.

Improved risk appetite reduced the need for speculators to hold on to low-yielding yen, which is often used as a safe-haven currency.

The dollar traded at 107.01 yen JPY=, flat on the day after having recovered from Tuesday’s low of 106.25 yen.

The dollar index stood at 85.314 .DXY =USD, extending its rebound from a three-week low of 84.472 hit a week ago.

U.S. CPI data due at 8:30 a.m. EDT is the next major focus.

Economists expect annual core CPI inflation to stay flat at 1.7 percent in September but a softer reading could undermine the dollar by adding to speculation that the Fed could wait longer before raising rates.

“The CPI data will be very important. If the market turns risk-off, money will flow to U.S. bonds. A weak figure will surely hurt the dollar,” said Koichi Takamatsu, the head of forex trading at Nomura Securities.

In Europe, traders will be looking to the minutes of the Bank of England’s policy meeting due later in the day. Poor inflation and wage growth data last week drove investors to push back their bets on the timing of an expected UK rate hike into the second half of next year.

Sterling traded at $1.6121 GBP=D4, off Tuesday’s high of $1.6186.

Source : Reuters