Euro at five-week highs before ECB, US data

Euro at five-week highs before ECB, US data

LONDON - The euro rose to trade near a five-week high against the dollar on Thursday as investors positioned for the European Central Bank's to keep interest rates unchanged with rising German yields lending it support.

While ECB policymakers have been at pains to keep their options open for more action to stimulate the economy - and effectively pump more euros into the market - the strength of German opposition seems to have pushed any action off into next year.

That, and data signals that may bring closer a cut in US Federal Reserve bond-buying, has prodded German interest rates a touch higher, improving the return for the euro.

In early European trade on Thursday, the single currency rose 0.2 per cent against the dollar to $1.3617, having hit $1.3640, its highest since late October.

"Nobody expects the ECB to do anything today," said Ulrich Leuchtmann, head of currency research at Commerzbank in Frankfurt.

"That's priced into the euro. But it's typical that the rest of the positions betting on the ECB not to do anything come into the market very close to the meeting."

Trading volumes in euro/dollar were more than double the average over the past month, according to data from the Reuters dealing platform.

There were also substantial risks out there in the day's events for the euro. While the ECB is expected to leave rates unchanged after last month's surprise cut to a record low of 0.25 per cent, its projections will probably point to inflation remaining below target into 2015.

That would raise pressure on the bank to take action to avoid a slide closer to the sort of deflation, or at least very low price growth, that has debilitated Japan over the past decade.

Annual euro zone inflation last week inched up to 0.9 per cent in November, giving the bank some room to manoeuvre.

Leuchtmann also said the euro's strength over recent months could be called into question if the ECB were to detail plans for another long-term refinancing operation (LTRO), giving banks access to cheap cash, though at least one senior policymaker has suggested that is not in the offing quite yet.

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