(Reuters) - The euro rose against the dollar and yen on Monday after Italy finally formed a government, ending two months of political uncertainty, but further gains may be limited given expectations the European Central Bank will cut interest rates this week.
Italy's new prime minister, center-left
politician Enrico Letta, named a coalition government on Saturday, a move that
drove Italian stocks higher and benchmark borrowing costs to their lowest level
since October 2010 at an auction on Monday.
Some analysts say the euro
could weaken should the ECB cut its main interest rate by 25 basis points from
0.75 percent currently when it meets on Thursday; a rate cut would erode the
euro's interest rate advantage over the dollar and yen.
"The euro would
likely weaken somewhat on that, but the overall move will be muted," said John
Doyle, currency strategist at Tempus Consulting in Washington, D.C. "The
expectation is starting to get priced in."
Boris Schlossberg, managing
director of FX Strategy at BK Asset Management in New York, said the euro could
even rally after a knee-jerk move lower as some investors see a rate cut by the
ECB as another effort to stimulate the euro zone economy.
that the euro zone economy is really in a quagmire and it needs some kind of
jumpstart," Schlossberg said. "There's almost nothing else available. A rate cut
is better than nothing."
"Even though the market initially perceives the
rate cut as a negative thing, it will actually be disappointed if they don't see
the rate cut and that can drive the euro down."
Signs are growing that
weakness in peripheral euro zone economies is spreading to the region's core,
such as Germany, its biggest economy. Confidence in the euro zone economy fell
more than expected in April, data showed on Monday, highlighting the souring
mood among companies and consumers since March. . A drop in German inflation
also contributed to the ECB rate cut argument, although the impact on the euro
will likely be limited.
The euro was up 0.51 percent at $1.3093, with
hedge funds cited among key buyers. It peaked at $1.3115, the highest since
April 19, midway through the London session.
The U.S. economy grew more
slowly than expected in the first quarter, and with inflation anchored,
expectations are fading that the Federal Reserve could cut back its quantitative
easing program anytime soon.
"That is weighing on the dollar," said Ian
Gunner, portfolio manager at Altana Hard Currency Fund In London.
said only a cut in the ECB's zero percent deposit rate, which he did not expect,
would cause the euro to fall sharply.
A two-day Federal Reserve policy
meeting beginning on Tuesday will be watched for whether the Fed indicates any
fresh risks to growth. If it does, there could be some trimming of long dollar
positions put in place in recent months.
Against the yen, the dollar was
flat at 98.01 yen, erasing losses after stronger-than-expected data on sales
contracts for previously owned U.S. homes.
The dollar set a four-year
high of 99.94 yen earlier in April after the Bank of Japan unveiled a major
The dollar has faced stiff resistance at 100 yen, but
many expect it to firm against the yen as Japanese investors such as insurance
companies and pension funds allocate some of their portfolios to overseas assets
in coming months.
Japan on Tuesday will report March economic data on
unemployment, industrial production and retail sales.
trend of yen selling is likely to be intact. We are seeing a reversal today
based on the fact that Japanese investors have not responded so far to moving
money abroad," said Eric Viloria, senior currency strategist at Forex.com.
"If the data are positive or stronger than expected, the yen could get a
boost from that," he said, noting the 97.75 dollar/yen level as proven support