The market had been evenly divided on the chances of the
easing decision by the Reserve Bank of Australia, but prospects
of further loosening will likely weigh on the currency for now.

The Australian dollar, was down 0.4 percent at
$1.0205. It had broken through support around $1.0220 to fall to
$1.0178 after the RBA cut rates by 25 basis points to 2.75
percent and indicated there was room to ease policy further.

This was the Australian dollar’s lowest since March 4 and
traders cited support at that day’s low of $1.0116.

“The market has clearly taken the RBA rate cut as signalling
not just a shift in timing, but also that ultimately rates will
fall further than was previously thought and that is being
negative for the Aussie,” said Adam Cole, global head of FX
strategy at RBC Capital Markets.

“For us, however, it is more an issue of timing and we don’t
expect the Aussie to fall much from here … it will likely form
a base around $1.02 and crawl back higher from there.”

The euro was at $1.3079, flat on the day after having
pulled back from Monday’s high of $1.3141.

It slipped after European Central Bank President Mario
Draghi said on Monday the bank would monitor incoming euro zone
data closely and be ready to cut rates further, including the
deposit rate currently at zero.

“For southern European countries, a euro above $1.30 would
be too high for their economy. Among major central banks, the
ECB has been the only bank that is not expanding its balance
sheet. But it will likely consider such a step,” said Minori
Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ.

Initial support for the euro is seen around $1.3024, the
76.4 percent retracement of its April 24-May 1 rally and the
55-day moving average at $1.3021. Traders cited bids from Asian
sovereign accounts at sub-$1.3050 levels which acted as support.

The euro also lost some ground against the yen and was down
0.2 percent at 129.59 and was still some way off a
3-year high of 131.10 set last month.

The pullback in the euro saw the dollar index drift up to
82.281, well away from last week’s 2-month low of 81.331.

The dollar gave up some of its recent gains against the yen
as Japanese traders returned to the market after the four-day
long weekend.

Analysts said the U.S. currency would have another go at the
tough resistance at 100 yen as the Japanese currency stayed
under pressure due to the Bank of Japan’s aggressive monetary
easing stance.

The dollar slipped 0.2 percent to 99.09 yen, after
having risen as high as 99.455 on Monday.

The ECB cut its benchmark refinancing rate by 25 basis
points to 0.5 percent, its first cut in 10 months and left the
deposit rate unchanged.

The euro rose 0.2 percent to $1.3215, inching towards
a two-month high of $1.3243 hit on Wednesday. Traders said any
gains in the euro could be capped by reported offers above
$1.3220.

ECB President Mario Draghi’s news conference at 1230 GMT
will now be watched for hints on whether further rate cuts are
in the pipeline or of additional non-conventional easing
measures.

“The ECB rate cut came out as expected so we had the move
higher in the euro,” said Jane Foley, senior currency strategist
at Rabobank.

“But recently we have seen the market hasn’t really had the
appetite for euro/dollar above the $1.32 level, that is where we
are right now. It will be interesting to see if the euro has the
momentum to go higher.”

Traders said they would be watching to see whether Draghi
can convince the market that ECB easing measures will be able to
help the economy.

DRAGHI AWAITED

Highlighting the fragility of the euro zone economy which
the ECB is trying to tackle, surveys on Thursday revealed a
deepening contraction in manufacturing in April.

“Besides the refi rate cut we would focus on if the ECB
unveils any measures to boost credit conditions, which would be
a positive,” said Kiran Kowshik, currency strategist at BNP
Paribas.

He added that if Draghi stressed increasing downside risks
to inflation markets could price in a future rate cut, which
would be negative for the euro. But he expected any dips would
be shallow.

“If you have Italian and Spanish bonds rallying it is
difficult to sell the euro. We think ultimately it will go
higher and we have a long recommendations on euro/dollar from
$1.3000 targeting $1.3400 with a stop-loss at $1.2840.”

Italian and Spanish bond yields hit new 2010 lows earlier on
Thursday on growing demand for higher-yielding debt.

The euro was also helped against the dollar as the U.S.
Federal Reserve on Wednesday said it would step up asset
purchases if needed, which hurt the dollar.

If U.S. jobs data on Friday adds to the recent picture of a
general softening in the U.S. economy it would intensify
speculation that the Fed’s next move is more likely to be to
increase debt purchases, which would be negative for the dollar.

* Fed meeting outcome due 1800 GMT

* U.S. manufacturing, jobs data this week could hurt dollar
further

* Euro near 2-week high ahead of ECB meeting

By Anooja Debnath

LONDON, May 1(Reuters) – Expectations the U.S. Federal
Reserve will stick to its aggressive stimulus programme kept the
dollar struggling near a two-month low against a basket of
currencies on Wednesday.

Although U.S home prices and consumer confidence data have
been encouraging, an unexpected contraction in business activity
on Tuesday combined with a recent run of soft data has sparked
worries of an economic slowdown and weighed on the dollar.

It could be dragged lower if, as expected, the Fed says
following its monthly meeting that it recognises the need for
further stimulus to help a still-patchy economic recovery.

The dollar index was at 81.714, after having fallen
to a trough of 81.598 on Tuesday, its lowest since February 28.
The break below 81.744, the 38.2 percent retracement of its
January-April rally, has opened the way to further losses.

“We think the Fed will be as dovish as it can afford to be,
and as such the softness of the dollar is justified and if
anything it could extend a bit further,” said Adam Cole, global
head of FX strategy at RBC Capital Markets.

“The Fed will at least recognise that (U.S.) data has been
soft since the last meeting and … there will be no talk of
tapering asset purchases or exit strategies or withdrawal of
monetary stimulus.” The Fed’s decision is due at 1800 GMT.

Just a month ago, most market players believed the Fed’s
next move would be to scale back its monetary easing programme.

Strategists said the Institute of Supply Management’s
manufacturing index at 1400 GMT and Friday’s employment report
will also be key for the dollar.

Trading was subdued in Asia and is likely to be so in
Europe, where many markets are observing the May Day holiday.

Against the U.S. currency, the euro was flat at
$1.3167, not far from Tuesday’s peak of $1.3187 – its highest
level since April 17. The euro now faces tough resistance around
$1.3200, a level that capped it last month.

The weak dollar has limited the euro’s losses despite
disappointing economic data from the bloc but that may change if
the European Central Bank cuts interest rates on Thursday.

The dollar was flat against the yen at 97.43 yen,
after having hit a two-week low of 96.99 yen the previous day.

The yen has been under intense pressure from the Bank of
Japan’s radical stimulus steps but strong support for the
currency at 100 from Japanese exporters and option players means
many yen bears are abandoning their bets for now.

“At the moment, the market is considering the 97-100 yen
range. But if upcoming U.S. economic data continues to
disappoint, there’s risk the dollar/yen’s trading range will
ratchet down to say 95-98,” said Yoshio Takahashi, analyst at
Barclays Capital in Tokyo.

Strategists however said losses in the euro are likely to be limited on prospects the U.S. Federal Reserve’s ultra-loose policy will be maintained and weigh on the dollar.

The single currency slipped after data showed inflation in the euro zone had fallen to a three-year low while unemployment rose to a record high.

The data followed German retail sales which fell for the second month running in March, confounding forecasts of a rise and inflation figures which hit its lowest in more than two years.

The euro was down 0.2 percent at $1.3077 with traders citing offers layered above $1.3110 and $1.3150 and chart resistance at its 100-day moving average of $1.3158. Near-term support was at the 55-day moving average of $1.3044.

Corporate accounts were cited as buyers of the euro on dips, limiting its losses post the data.

“The euro zone unemployment rate was at a disappointingly high level which certainly is of concern… this is a further argument for the ECB to cut interest rates,” said Ulrich Leuchtmann, head of FX research at Commerzbank.

Some analysts said while a rate cut could see the euro initially fall, announcing further easing measures would be interpreted as a positive move by the central bank and this could lend the euro some support.

“If the ECB were to resort to a refinancing rate cut on Thursday and announce non-standard measures to boost credit flow, we could see a bounce in the euro. But anything above $1.32 is a sell,” said Jeremy Stretch, currency strategist at CIBC World Markets.

He added that dollar weakness was checking a sharper fall in the euro.

A slide in the two-year Treasury yield to a nine-month low of 0.21 percent weighed on the U.S. currency.

The dollar index, which measures its value against a basket of six major currencies, last traded at 82.165 .DXY. It hit a trough of 82.035 on Monday, its lowest since April 17.

The Fed kicks off its two-day policy meeting on Tuesday and investors are watching to see if a sluggish recovery and slowing inflation could not only end talk of tapering its bond-buying but push the central bank into buying more assets.

“We are currently seeing significant dollar weakness… reason for this is mainly speculation on further Fed quantitative easing policy,” Leuchtmann said.

“The view that the Fed would scale down QE is coming more and more under question due to poor U.S. data.”

The dollar was down 0.4 percent on the day against the yen at 97.40 yen, not far from 97.35 yen hit on Monday, its lowest level in almost two weeks.

(Additional reporting by Anirban Nag; editing by Keiron Henderson)

Demand for bonds from the more indebted euro zone countries helped buoy the currency after centre-left politician Enrico Letta took over as Italy’s prime minister, ending a deadlock.

The euro was up 0.5 percent on the day at $1.3095, with hedge funds cited as main buyers. Strategists said sellers would probably emerge around the $1.3100 level, where there are also reported option expiries.

“Investors are trying to balance two risks: a further reduction in peripheral bond yield spreads which is euro positive, and the prospects of further easing by the ECB which historically has proven to be euro negative,” said Valentin Marinov, head of European G10 FX strategy at Citi.

There are broad market expectations the ECB will cut rates to 0.5 percent from 0.75 percent at its policy meeting on May 2 to support the euro zone’s recession-hit economy.

The dollar fell broadly as traders reduced exposure to the United States after data last week showed the economy grew at a slower-than-expected pace in the first quarter.

It dropped 0.3 percent versus the yen to 97.75 yen, edging away from a four-year high of 99.95 yen set earlier in April when the Bank of Japan announced major monetary stimulus.

Although the dollar has faced stiff resistance at 100 yen in recent weeks, many market players expect the greenback to head higher versus the yen over the medium term due to the BOJ’s aggressive monetary easing.

The Federal Reserve holds a two-day policy meeting, starting on Tuesday. The closely watched jobs report is on Friday.

(Additional reporting by Masayuki Kitano; Editing by Jeremy Gaunt.)

The risk that the first estimate of British gross domestic product (GDP) on Thursday could point to recession also weighed on the pound.

Business surveys on Tuesday suggested cracks emerging in the global recovery story in Europe and China, driving some market participants to the safety of the yen and the dollar.

In Britain, while slightly better-than-expected public borrowing numbers offered sterling some help with a few long-term investors buying the currency at lower levels, factory orders weakened unexpectedly in April.

Sterling was down 0.1 percent at $1.5275, having slipped to $1.5196 against the dollar earlier in the session, its weakest level since April 4. Offers to sell the pound were layered around $1.5300, traders said.

“We have seen a negative reaction today to some negative data from the euro zone and China … but I would not expect to see traders take up any significantly different positions on sterling now until we see Thursday’s GDP data,” said Nawaz Ali, UK market analyst with Western Union.

“The big worry will be if (GDP) turns out to be zero percent or negative, and if we do see a triple dip. Then I think markets will start making preparations for some monetary fireworks from the Bank of England.”

Ali added that if the economy escapes its third recession in less than five years, the pound may get a lift.

The Bank has refrained from increasing the size of its asset purchase programme from its present 375 billion pounds ($572 billion) in recent months, but with the economy showing few signs of picking up, expectations for more easing are high.

Andy Scott, premier account manager at currency brokerage HiFX said while the public borrowing numbers were better, they still showed the deficit was at 5 percent of GDP and with little growth and no revenues, the country was on track to hit the 100 percent debt to GDP ratio in 2015.

“Anything below this (0.1 percent) is likely to hit sterling quite hard as the pressure on the Bank to ease monetary policy would increase further,” Scott said.

Late last week Fitch Ratings stripped the country of its triple-A credit rating, citing a weaker economic and fiscal outlook, and following in the footsteps of fellow agency Moody’s.

EURO FALTERS VS POUND

Sterling however outperformed the euro. The single currency was down 0.2 percent at 85.26 pence. The euro was stung by data which showed the German private sector shrank for the first time in five months in April.

That is likely to keep alive prospects of a rate cut by the European Central Bank in the near term.

Analysts at Morgan Stanley, who are bearish on the pound, said the weakness in Germany and core euro zone economies was not good news for Britain given the currency bloc is the country’s biggest trading partner.

“UK exports are still declining on a year-on-year basis and at a rate which has historically been followed by the pound’s decline,” they said in a note on Tuesday.

They forecast sterling at $1.43 by year-end.

(Reporting by Anooja Debnath; Additional reporting by Anirban Nag; Editing by Ruth Pitchford)

The dollar last stood at 99.71 yen, up 0.2 percent on the day. It had earlier climbed to as high as 99.90 yen which was within striking distance of a four-year high of 99.95 set on April 11 and the 100 level, where option barriers are cited to be lined up.

A break there could trigger stop-loss buying, which could take the pair up to 101.45 yen, the April 2009 high which could act as near-term resistance. Reported large option expiries at 100 will keep the currency pinned to that level.

Data last Friday showed currency speculators raised their bets against the yen in the week ended April 16, while lifting positions in favor of the U.S. dollar.

The Bank of Japan governor Haruhiko Kuroda reiterated on Monday that the G20 accepted that Japan’s radical easing policy was aimed at beating deflation and not at weakening the currency.

“Japan not only escaped criticism, but on the contrary won praise as a country that was fulfilling its global obligations…,” said Marshall Gittler, head of global FX strategy at IronFX.

“That is in effect the green light for the BoJ’s easing, which we expect will push USD/JPY through the magic 100 number in the not-too-distant future – perhaps as early as today.”

Some analysts however cautioned that the pair might face some resistance before the 100 mark ahead of a Bank of Japan meeting on Friday.

“Dollar/yen hitting 100 is going to be a case of ‘when’ rather than ‘if’,” said Jeremy Stretch head of currency strategy, at CIBC. “The level will probably go but then we need to look at the durability of the move particularly as we wait for the Bank of Japan at the end of the week.”

The yen has weakened 23 percent against the dollar since mid-November, when Shinzo Abe, who became Prime Minister in December, promised bold monetary and fiscal expansionary policies during his election campaign.

The BOJ’s sweeping monetary expansion unveiled earlier this month, which aims to inject $1.4 trillion into the economy in less than two years, has given fresh momentum to yen weakness.

Many market players expect the BOJ’s massive bond buying to force real-money Japanese investors such as life insurers to shift more funds to higher-yielding foreign bonds.

“Japanese real money investors are expected to announce further details of their investment intention for the new fiscal year over the coming days; hence, with the G20 support for BoJ policy, we expect the JPY-weakening trend to remain intact,” analysts at Morgan Stanley said in a note, although they recommended staying cautious ahead of the BOJ meeting.

The euro also rose against the yen, and was last up 0.2 percent at 130.08 yen,. It was nearing a three-year peak of 131.10 set earlier in the month.

EURO VULNERABLE

Against the dollar, the euro was down 0.1 percent at $1.3035. The euro, which failed to break above $1.32 recently, has been stuck in a $1.30-32 range in the past week or so.

Political uncertainty in Italy had kept a lid on the euro but the country’s re-election of a president on Saturday has raised the prospect of an end to the two months of political stalemate that followed a general election.

The common currency had also been hamstrung by persistent talk of an interest rate cut by the European Central Bank. ECB Governing Council member Ewald Nowotny on Saturday said it was too early to judge whether a cut is needed.

Strategists said the euro could come under pressure if flash Purchasing Managers’ Index data tomorrow disappointed.

“If we don’t see an element of stabilization, let alone improvement (in the flash PMIs) then the euro could come under pressure,” said Stretch adding that if the euro broke below the $1.3020-22 level it could slide to sub-$1.30 levels.

(Additional reporting by Ian Chua and Hideyuki Sano; Editing by Toby Chopra)

Retail sales for March fell broadly in line with expectations, keeping the jury out on whether poor domestic demand and consumer spending pushed the British economy into recession in the first quarter.

Markets were forecasting a 0.8 percent fall in retail sales in March due to the unusually cold weather, so a 0.7 percent drop did little to support the currency, which fell to $1.5223, not far from the day’s low of $1.5218.

The pound, however, saw some support against the dollar after poor U.S. factory activity data added to worries the recovery of the world’s largest economy was faltering.

Sterling was up 0.3 percent at $1.5281, after it broke through initial resistance of $1.5272, its 55-day moving average. There were reported offers to sell the pound above $1.5300, keeping any significant gains capped.

“While we don’t expect the UK economy to be in recession, we do think it will have sluggish growth and the Bank will become more aggressive to support policy easing,” said Peter Frank, FX strategist at BBVA.

“In the near term there is a big chance of a drop in sterling/dollar… we are looking at $1.44-$1.45 in the next two months.”

Sterling has steadily retreated from a two-month high of $1.5412 hit last week. It struggled on Wednesday after data showed unemployment rising.

“Most of the UK data has been disappointing. This along with expectations that a new leadership at the Bank could see more monetary easing will see sterling/dollar lose ground in the medium term,” said Alvin Tan, currency strategist at Societe Generale.

While the minutes from the latest Bank monetary policy committee meeting showed policymakers remained split on whether to restart its asset purchase programme, many analysts believe that more quantitative easing is likely once new Governor Mark Carney takes over on July 1.

Quantitative easing involves pumping cash into the economy through bond-buying and tends to weigh on a currency by increasing its supply.

Sterling was flat against the euro on Thursday at 85.50 pence, off a one-month high for the single currency of 86.37 pence struck on Wednesday.

The euro was hurt in the previous session by Bundesbank chief Jens Weidmann’s suggestion that the European Central Bank may adjust interest rates if new data warrants a cut and analysts expect its gains against the pound to run out of steam.

(Editing by Toby Chopra)

The highly-liquid Japanese currency, which is usually sought
in times of financial uncertainty, rose earlier this week after
a historic plunge of around 9 percent in gold prices on Monday
and on concerns about China’s slowing economic growth.

Markets, however, stabilised with spot gold finding
some ground on Wednesday, rising 1 percent on the day to
$1,380.39 per ounce.

This helped the yen resume its fall which was triggered by
the Bank of Japan’s aggressive stimulus programme earlier this
month. Strategists said markets will focus on the Group of
Twenty meeting beginning on Thursday, for any comments on
concerns about the Japanese currency’s weakness.

The dollar was up 0.8 percent on the day at 98.25 yen
, although still down about 1.6 percent from a four-year
high of 99.95 yen set last week. Traders cited buying by
Japanese importers earlier in the day.

The euro climbed 0.8 percent to 129.52 yen, but
stayed some way off a three-year peak of 131.10 yen hit last
week.

“The dollar has now rebounded strongly… over the next
couple of days we might see some consolidation around current
levels but with the easing from the BOJ we think the dollar will
trade higher versus the yen,” said Marcus Hettinger, global FX
strategist at Credit Suisse adding he expects the pair to hit
102 yen within the next three months.

The BOJ’s radical monetary policy overhaul will pump about
$1.4 trillion into the economy in less than two years, via a
bond-buying scheme that is expected to drive Japanese investors
to look overseas in search of better yields.

Strategists, however, cautioned that the dollar was likely
prone to retracement versus the yen given its swift rise since
mid-November when Japan’s current prime minister began calling
for aggressive easing as part of his election campaign.

The dollar has gained about 28 percent from its lows last
October.

G20 IN FOCUS

In the near-term, the market will be look at the G20 meeting
beginning on Thursday, where finance ministers and central
bankers from the world’s leading economies will discuss the
economic and financial market outlook, including the Cyprus
crisis and asset price reactions.

Strategists said it seems unlikely that Japan will face any
significant criticism over the BOJ’s aggressive monetary easing.

“Japan’s easing objective is domestic as they try to fight
deflation and they are only buying domestic assets and not
foreign bonds, so I don’t think there will be any criticism
especially now after the correction lower in dollar/yen,” said
Hettinger.

A senior Canadian financial official said on Tuesday that
Canada was supportive of Japan’s effort to kick-start its
economy and that the G20 believed policy should target domestic
economies and not exchange rates.

The International Monetary Fund also showed its support
saying Japan’s expansion drive was not excessive and it could
help haul its economy from stagnation.

“We continue to look to use dips (in dollar/yen) to
re-establish bullish strategies. The comments from the delegates
at the IMF meetings so far appear to be supportive of the
Japanese policy approach,” analysts at Morgan Stanley said.

The euro was flat against the dollar at $1.3185,
after having hit a seven-week high of $1.3202 on Tuesday, partly
helped by its bounce versus the yen.

The single currency had added to its gains on Tuesday after
breaching resistance at its 100-day moving average at roughly
$1.3155, a level which could now act as support for the euro.

The highly liquid yen tends to benefit in times of stress in the global economy or financial markets. It has been a big beneficiary in the past few days after poor Chinese and U.S. economic data, a plunge in gold prices and explosions in Boston combined to push investors into less risky assets.

Selling of the yen also lost momentum after a United States currency report late last week said it would watch Japan’s policies to ensure Tokyo was not devaluing its currency to gain competitive advantage for exports.

Earlier on Tuesday, the dollar had fallen to 95.67 yen, its lowest since April 4, when the Bank of Japan announced a massive stimulus package aimed at defeating deflation, but it later recovered to trade up 1.2 percent at 97.92 yen.

“Over the last couple of days we have seen quite a sharp yen short squeeze which pulled dollar/yen just below the 96 level,” said Lee Hardman, currency economist at BTMU.

“That’s been driven by pick up in risk aversion, more broadly linked to global growth concerns and the attacks in Boston yesterday.”

While the dollar was still down more than 2 percent from a four-year high of 99.95 yen hit last Thursday following the Bank of Japan’s $1.4 trillion stimulus launch, analysts said the yen’s longer-term weakening trend was still intact.

“The fundamental picture still remains supportive of a weaker yen going forward as the recent rebound over the last couple of days is unlikely to prove sustainable,” Hardman said. BTMU forecasts the dollar at 109 yen in 12 months.

The euro also jumped 1.7 percent to 128.19 yen.

News of explosions in Boston which a White House official said are being treated as an “act of terror”, earlier prompted speculators to sell the euro and growth-linked currencies.

The euro also briefly dipped to a session low of $1.3028 after data showed the German ZEW sentiment index fell sharply in April, suggesting Europe’s largest economy is feeling the heat from the still unresolved euro zone crisis and disappointing economic data.

The euro later recovered to trade up 0.6 percent on the day at $1.3115, with a central bank cited as the main buyer. Reported option expiries at $1.3100, could keep the currency pinned at that level.

“The corrective pullback in euro/dollar has remained extremely limited, suggesting the uptrend is now likely to be resumed,” analysts at Morgan Stanley said.

“Spillover effects from the decline in gold prices are expected to remain limited on the euro. We now expect a re-test of the 1.3140 level with a move above here opening the way for gains towards the 1.3270/1.3300 target area.”

GOLD FADES

Traders said investors would need to see a clearer sign that commodity prices are stabilising before their appetite for riskier assets returns. Gold fell 9 percent on Monday, its biggest percentage loss since 1983, spooking many traders.

Robert Rennie, head of currency strategy at Westpac said in a note that Japanese investors in gold may have been big sellers after the precious metal hit a record high in yen-denominated terms last week.

He added that until Japanese domestic investors, like banks, insurance companies and pension funds, step up purchases of foreign assets, they are likely to trim their gold holdings.

The latest drop in gold came after disappointing Chinese data, talk of large-scale selling by a big fund, and news that the central bank of Cyprus might sell gold reserves, though traders are unsure exactly what has caused such a big slide.

Spot gold showed a slight recovery and last stood at $1,386.40 per ounce, up more than 2 percent on the day. <GOL/>

(Editing by Catherine Evans)